<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1997
REGISTRATION NO. 333-25989
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JLK DIRECT DISTRIBUTION INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 5084 23-2896928
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
</TABLE>
STATE ROUTE 981 SOUTH
P.O. BOX 231
LATROBE, PA 15650-0231
(412) 539-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
MICHAEL W. RUPRICH
JLK DIRECT DISTRIBUTION INC.
STATE ROUTE 981 SOUTH
P.O. BOX 231
LATROBE, PA 15650-0231
(412) 539-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
LEWIS U. DAVIS, JR., ESQ. VINCENT PAGANO, JR., ESQ.
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION SIMPSON THACHER & BARTLETT
20TH FLOOR, ONE OXFORD CENTRE 425 LEXINGTON AVENUE
301 GRANT STREET NEW YORK, NY 10017
PITTSBURGH, PA 15219
(412) 562-8800 (212) 455-2000
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 23, 1997
PROSPECTUS
4,257,000 SHARES
JLKDIRECT LOGO
CLASS A COMMON STOCK
------------------------
All of the shares of Class A Common Stock, par value $.01 per share (the
"Class A Common Stock"), offered hereby (the "Offering") are being offered by
JLK Direct Distribution Inc. (the "Company"), a wholly owned subsidiary of
Kennametal Inc. ("Kennametal").
Each share of Class A Common Stock entitles its holder to one vote, and
each share of Class B Common Stock, par value $.01 per share (the "Class B
Common Stock" and, together with the Class A Common Stock, the "Common Stock"),
entitles its holder to 10 votes. Upon completion of the Offering, Kennametal
will continue to own all of the shares of Class B Common Stock, which will
represent approximately 83.1% of the aggregate shares of Common Stock (80.5% if
the Underwriters' over-allotment option is exercised in full) and will entitle
Kennametal to cast approximately 98.0% of the votes (97.6% if the Underwriters'
over-allotment option is exercised in full) which may be cast at any meeting of
the shareholders of the Company. Accordingly, Kennametal will continue to
control the Company. See "Risk Factors--Control by Kennametal" and "--Conflicts
of Interest."
Prior to the Offering, there has been no public market for the Class A
Common Stock. It is currently estimated that the initial public offering price
will be between $16.00 and $18.00 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price. Shares of Class A Common Stock are being reserved for sale to
certain employees and directors of the Company and Kennametal and to certain
outside parties, largely product vendors of the Company, at the initial public
offering price. Such employees, directors and other persons are expected to
purchase, in the aggregate, not more than 5% of the Class A Common Stock offered
in the Offering. See "Underwriting."
The Class A Common Stock has been approved for listing on the New York
Stock Exchange under the symbol "JLK."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================
PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING COMPANY(2)
DISCOUNT(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
======================================================================================================
</TABLE>
(1) The Company and Kennametal have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,400,000.
(3) The Company has granted the several Underwriters an option, exercisable
within 30 days after the date hereof, to purchase up to 640,000 additional
shares of Class A Common Stock solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Class A Common Stock offered hereby are offered by the
several Underwriters, subject to prior sale, when, as and if issued to and
accepted by them, subject to approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the shares of Class A Common Stock will
be made in New York, New York on or about , 1997.
------------------------
MERRILL LYNCH & CO. GOLDMAN, SACHS & CO.
------------------------
The date of this Prospectus is , 1997.
<PAGE> 3
[PHOTOGRAPHS OF CATALOGS, A SHOWROOM, PERSONNEL AND PRODUCTS OF THE COMPANY.]
Certain persons participating in this Offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Class A Common
Stock. Such transactions may include stabilizing, the purchase of Class A Common
Stock to cover syndicate short positions and the imposition of penalty bids. For
a description of these activities, see "Underwriting."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus. JLK Direct Distribution Inc., a recently
formed wholly owned subsidiary of Kennametal Inc. ("Kennametal"), will own,
operate and distribute the industrial supply products previously marketed, sold
and distributed by Kennametal through its integrated industrial supply programs
("Full Service Supply Programs") and its wholly owned J&L America, Inc.
subsidiary, which has and will continue to do business as "J&L Industrial
Supply" (together, the "Industrial Supply Business"). Except as otherwise noted
or unless the context otherwise requires, (i) the information in this Prospectus
gives effect to the contribution (the "Contribution") to the Company of the
Industrial Supply Business, (ii) the "Company" refers, with respect to any date
prior to the effective date of the Contribution, to the Industrial Supply
Business and, with respect to any date on or subsequent to the effective date of
the Contribution, to JLK Direct Distribution Inc. and its subsidiaries,
including J&L America, Inc., (iii) "Kennametal" refers to Kennametal and its
subsidiaries other than the Company, J&L America, Inc. and Kennametal's Full
Service Supply Programs, (iv) "fiscal" in connection with a year means the 12
months ended June 30 of the calendar year specified, (v) "active customers"
refers to direct-marketing customers which have purchased products from the
Company within the 12 months preceding the relevant period end and (vi) the
information in this Prospectus assumes no exercise of the Underwriters' over-
allotment option (if the Underwriters' over-allotment option is exercised, the
Underwriters may purchase up to an additional 640,000 shares of Class A Common
Stock from the Company and Kennametal's shares of Class B Common Stock will be
correspondingly reduced at that time).
This Prospectus contains certain forward-looking statements (as such term
is defined in the Securities Act) concerning the Company's operations,
performance and financial condition, including, in particular, the likelihood of
the Company's success in developing and expanding its business. These statements
are based upon a number of assumptions and estimates which are inherently
subject to significant uncertainties and contingencies, many of which are beyond
the control of the Company. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, those
set forth in "Risk Factors." Forward-looking statements contained in this
Prospectus are not subject to the "safe harbor" provisions for forward-looking
statements contained in the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.
THE COMPANY
The Company is one of the largest suppliers of a broad range of
metalworking consumables and related products to customers in the United States,
offering a full line of cutting tools, carbide and other tool inserts,
abrasives, drills, machine tool accessories, hand tools and other industrial
supplies. To meet the varying supply needs of small, medium and large-sized
customers, the Company offers: (i) a direct-marketing program, whereby the
Company supplies predominantly small and medium-sized customers through catalog
and showroom sales and (ii) integrated industrial supply programs, by which
large industrial manufacturers engage the Company to carry out all aspects of
complex metalworking supply processes, including needs assessment, cost
analysis, procurement planning, supplier selection, "just-in-time" restocking of
supplies and ongoing technical support. The Company also conducts its
direct-marketing program for small and medium-sized customers in the United
Kingdom.
The Company estimates the size of the United States market for metalworking
consumables and other related products in which the Company participates at
approximately $50.0 billion. The Company believes it has and will continue to
enjoy strong growth from two important trends now impacting the industrial
supply industry. First, the industrial supply industry is experiencing
consolidation of currently fragmented distribution channels, as customers seek
and technology makes possible the convenience, cost savings and economies of
scale associated with single sources of supplies. Second, to achieve even
greater cost savings and efficiencies, manufacturers are outsourcing complex
procurement and possession processes needed to supply metalworking products that
are critical to their manufacturing operations. As a market leader with a broad
range of products and services and proven capabilities, the Company is
well-positioned to continue to take advantage of these industry trends.
3
<PAGE> 5
The direct-marketing program serves the needs of predominantly small and
medium-sized metalworking customers by offering 100,000 stock keeping units
("SKUs") through the Company's 1,465 page master catalog, monthly promotional
sales flyer (the "Advantage"), additional mailings and advertisements,
telemarketing efforts, direct sales efforts and 24 showrooms. The Company offers
customers the advantages of (i) a single source of supply for all metalworking
consumables and related products, (ii) a tiered product offering (such as
"good," "better" and "best"), (iii) same-day pick-up for the most popular
products stocked at showrooms, (iv) same-day direct shipping and (v) a
state-of-the-art order entry system that tracks product availability and
pricing, provides technical product information and results in an order being
completed in an average time of three minutes. In addition, the Company has a
dedicated sales force based in each showroom that actively calls on targeted
customers.
Full Service Supply Programs allow customers to achieve substantial cost
savings in metalworking consumables and overall manufacturing processes by
outsourcing the entire process of acquiring and possessing metalworking and
related products at manufacturing facilities. Customers, such as General Motors
Corporation, Allied Signal and Emerson Electric, use Full Service Supply
Programs at designated manufacturing facilities to (i) consolidate all of their
metalworking consumables and related product purchases with one vendor, (ii)
eliminate a significant portion of the administrative overhead burden associated
with the internal purchasing function, (iii) ensure appropriate technical
expertise in the selection and use of supplies for complex metalworking
processes and (iv) minimize the level of investment in tooling inventory,
thereby reducing inventory carrying costs. The Company's technical experts
customize and manage a comprehensive computerized product identification,
tracking and purchasing system that analyzes and optimizes supply usage, helps
select appropriate products and allows for "just-in-time" replacement of
inventory. To increase efficiency and maximize cost savings for its customers,
the Company also provides ongoing application assistance in the usage of
metalworking tools. The Company believes that its Full Service Supply Programs
typically reduce customers' costs of acquiring, possessing and using
metalworking products by approximately 5% to 20% per year.
The Company has grown rapidly due to geographic expansion, expanded product
offerings, increased direct mailings and an increased demand for both
single-source supply and integrated industrial supply programs such as its Full
Service Supply Programs. From fiscal 1993 through fiscal 1996, the Company's net
sales increased from $109.4 million to $244.0 million, representing a compound
annual growth rate ("CAGR") of 30.7%. Operating income during this period
increased from $5.0 million to $24.9 million, representing a CAGR of 70.4%.
During this same period, the Company's number of active direct-marketing
customers increased from 47,000 to 71,000 and the number of such customers who
purchased annually over $10,000 of products increased from 800 to 2,300.
Specific drivers of growth include:
- STRONG GROWTH IN EXISTING MARKETS. The Company has grown its net sales
84% from fiscal 1993 through fiscal 1996 in areas where it has had an
existing showroom as of the beginning of fiscal 1993 or which have been
served only through catalog sales. The Company did not add a showroom in
these areas during that period. The primary source of this growth has
been from areas where a showroom existed. In these areas, the Company
gained marketshare through targeted marketing to existing and prospective
customers.
- PENETRATION OF NEW MARKETS. From fiscal 1993 through fiscal 1996, net
sales have grown 233% in areas in which new showrooms have been added,
with 12 new showrooms in the United States and one in the United Kingdom
added during the period. Along with these showrooms, the Company uses a
focused sales call process to build sales.
- EXPANDED PRODUCT OFFERINGS. From the beginning of fiscal 1993 through
fiscal 1996, the Company added over 600 pages, including 40,000 new SKUs
and 165 product brand names and private labels, to its annual master
catalog.
- EXPANSION OF FULL SERVICE SUPPLY PROGRAMS. From the beginning of fiscal
1993 through fiscal 1996, the number of customers in Full Service Supply
Programs increased from nine to 42, with site locations increasing from
32 to 86.
4
<PAGE> 6
The Company believes that a significant factor contributing to its growth
has been its ability to identify itself as an affiliate of Kennametal, the
largest North American provider of metalcutting tools and tooling systems. The
Company also relies upon and markets its access to Kennametal's research and
technical expertise in tooling products and supplies. See "Risk Factors--Control
by Kennametal." The Company was incorporated in Pennsylvania on April 28, 1997
to be a holding company for the Industrial Supply Business.
BUSINESS STRATEGY
The Company's business strategy is to become the preferred supplier of
metalworking consumables and related products to the metalworking industry by
being a "one-stop shop" for metalworking products for small and medium-sized
customers and by offering managed solutions for large customers. The Company
believes its market-leadership position results from the successful
implementation of its business strategy, the major elements of which include:
- BREADTH OF METALWORKING PRODUCTS AND METALWORKING FOCUS. As its
customers continue to consolidate their suppliers, the Company
differentiates itself through its breadth of metalworking products and
metalworking focus. The Company believes its ability to offer a broad
spectrum of metalworking products and a tiered product selection
alternative through which similar product offerings with varying degrees
of name recognition, quality and price are categorized, such as "good,"
"better" and "best," has been an important component in expanding
direct-marketing sales to small and medium-sized customers. The Company's
metalworking focus also enables the Company to understand complex
industrial metalworking processes so as to provide valuable technical
advice that reduces costs to its Full Service Supply Program customers.
- EXCEPTIONAL CUSTOMER SERVICE. The Company emphasizes exceptional
customer service supported by sophisticated information systems and
ongoing employee training. The Company's telemarketing representatives,
utilizing sophisticated customer support software, inform catalog
customers on a real-time basis of the Company's product availability and
pricing, verify credit information, update customer information and
provide technical product information in calls lasting on average only
three minutes. For customers participating in its Full Service Supply
Programs, the Company provides continuous improvement specialists to
ensure quality service and low costs by assisting such customers in the
acquisition, possession and use of metalworking consumables and related
products.
- RAPID FULFILLMENT AND JUST-IN-TIME PRODUCT DELIVERY. The Company
believes that its ability to fulfill rapidly the orders of
convenience-driven customers and manage complex procurement processes for
large clients has been critical to its growth. The Company has developed
highly efficient inventory management and order fulfillment systems that
allow more than 99% of domestic orders received by 5:00 p.m. to be
shipped on the same day and delivered by low-cost ground carriers. In
addition, in its Full Service Supply Programs, the Company uses
sophisticated systems that permit "just-in-time" purchasing and delivery
of products resulting in low costs to its customers.
- COMMITMENT TO TECHNOLOGICAL INNOVATION. The Company uses technology to
benefit customers and to improve the Company's productivity and
efficiency. The Company's sophisticated customer support software tracks
all 100,000 SKUs, enabling its telemarketing representatives to inform
catalog customers on a real-time basis of the Company's product
availability and pricing, verify credit information, update customer
information and provide technical product information. The software for
Full Service Supply Programs allows the Company to manage and automate a
large customer's entire processes related to the acquisition, possession
and use of metalworking consumables and related products.
5
<PAGE> 7
GROWTH STRATEGY
The Company's objective is to expand its leadership position as a preferred
supplier to small, medium and large customers for metalworking consumables and
related products. The major elements of the Company's growth strategy include:
- INCREASED PENETRATION OF EXISTING MARKETS. The Company intends to
increase sales to small and medium-sized consumers by (i) expanding
targeted direct-mail and related campaigns, (ii) increasing the number of
products, product lines, product brand names and private labels offered
in its master catalog and (iii) focusing the Company's sales force on
marketing to these consumers. The Company plans to build on its
comprehensive marketing approach, which includes special showroom events
and targeted direct-mail and ongoing product promotions. In markets in
which the Company has had showrooms for at least three years, such as the
Detroit metropolitan area, the Company intends to increase its market
share by adding showrooms and expanding the services it offers to its
customers. The Company also plans to build on its reputation with Full
Service Supply Program customers to expand into other facilities of such
customers, while seeking new customers.
- FURTHER EXPANSION INTO NORTH AMERICAN MARKETS. To continue expanding its
North American presence, the Company plans to increase distribution
capacity and operational efficiency, add new showrooms and increase the
customer base for its Full Service Supply Programs. The Company plans to
construct a new midwest distribution center with a portion of the
proceeds from the Offering. New showrooms have historically resulted in
substantial growth in sales in the surrounding territory. For example,
when the Company opened its showroom in Atlanta in September 1995, sales
in that market increased by over 200% in the following nine months. The
Company has showrooms in 19 of the top 50 industrial markets in the
United States and intends to have showrooms in 40 of such 50 markets over
the next several years. In connection with this expansion, the Company
will continue to consider strategic acquisitions of metalworking
distributors, such as its acquisition in April 1997 of the Strelinger
Company ("Strelinger"), based in Troy, Michigan (the "Strelinger
Acquisition"), and its acquisition in May 1997 of Mill & Abrasive Supply,
Inc. ("M&A"), based in Roseville, Michigan (the "M&A Acquisition"). The
Company intends to continue to leverage its relationship with Kennametal
to market its Full Service Supply Programs to large industrial
metalworking customers of Kennametal. The Company also intends to
customize versions of its Full Service Supply Programs to meet the needs
of medium-sized industrial facilities. The Company estimates that the
market for Full Service Supply Programs consists of 12,000 to 15,000
industrial manufacturing facilities in the United States.
- EXPANSION INTO INTERNATIONAL MARKETS. The Company believes that the
consolidation and outsourcing trends which provide growth opportunities
in the United States also offer comparable opportunities in international
markets. The Company entered the United Kingdom market in fiscal 1995
with a 256-page catalog which included over 20,000 products. In April
1997, the Company released an 800-page catalog which includes over 60,000
products. The Company now has over 13,000 active customers in such
market. Over the next five years, the Company anticipates launching
additional direct-marketing efforts and opening showrooms in the United
Kingdom, Germany and certain other European countries and is considering
direct marketing in certain other countries. The Company is also planning
to introduce its Full Service Supply Programs into international markets,
such as the United Kingdom and Germany, by offering this service to
foreign manufacturing facilities of the Company's domestic Full Service
Supply Program customers and to Kennametal's foreign customers.
The address of the Company's principal executive offices is State Route 981
South, P.O. Box 231, Latrobe, Pennsylvania 15650 and its telephone number is
(412) 539-5000.
6
<PAGE> 8
THE OFFERING
Class A Common Stock
offered....................... 4,257,000 shares
Common Stock outstanding after
the Offering:
Class A Common
Stock(1)(2)................... 4,257,000 shares
Class B Common
Stock(1)...................... 20,897,000 shares
Total Common
Stock(2)...................... 25,154,000 shares
Use of proceeds............... The net proceeds from the Offering, after
deducting estimated underwriting discounts and
expenses, are estimated to be approximately
$66.1 million and will be used (i) to repay
$20.0 million of indebtedness related to a
dividend paid to Kennametal on April 28, 1997,
(ii) to repay amounts due to Kennametal
totaling approximately $19.0 million relating
to acquisitions, income taxes and employee
benefit obligations, (iii) to acquire or
construct a new Midwest distribution center,
(iv) to provide working capital for new
showrooms and Full Service Supply Programs and
(v) to fund acquisitions. See "Use of
Proceeds."
Voting rights................. The holders of Class A Common Stock generally
have rights, including as to dividends,
identical to those of holders of Class B Common
Stock, except that holders of Class A Common
Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to
10 votes per share. Holders of Class A Common
Stock and Class B Common Stock generally vote
together as a single class, except as otherwise
required by Pennsylvania law. See "Description
of Capital Stock--Common Stock--Voting Rights."
Under certain circumstances, Class B Common
Stock converts to Class A Common Stock. See
"Description of Capital Stock--Common
Stock--Conversion."
New York Stock Exchange
symbol........................ "JLK"
- ---------
(1) The shares of Class B Common Stock are convertible at any time into shares
of Class A Common Stock. See "Description of Capital Stock--Common
Stock--Conversion."
(2) Does not include 450,000 shares of Class A Common Stock issuable upon
exercise of stock options that will be granted to executive officers and
directors of the Company upon consummation of the Offering. Such options
will be subject to a one-year vesting period. See "Management--Executive
Compensation" and "--JLK Direct Distribution Inc. 1997 Stock Option and
Incentive Plan."
RISK FACTORS
See "Risk Factors" for a discussion of certain risks that should be
considered in connection with an investment in the Class A Common Stock offered
hereby.
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated income statement and balance sheet data for the
Company presented below are derived from the Company's Consolidated Financial
Statements. The Company's Consolidated Financial Statements as of and for the
fiscal years ended June 30, 1994, 1995 and 1996 have been audited by Arthur
Andersen LLP. The Consolidated Financial Statements as of and for the nine
months ended March 31, 1996 and 1997 are derived from the Company's unaudited
interim financial statements appearing elsewhere in this Prospectus, which in
the opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary to state fairly the data included therein in
accordance with generally accepted accounting principles for interim financial
information. Results for the nine months ended March 31, 1997 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year. The financial information for the fiscal years ended 1992 and 1993
is derived from the Company's unaudited Consolidated Financial Statements. The
summary financial information presented below should be read in conjunction
with, and is qualified by reference to, the more detailed information in the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus, Management's Discussion and Analysis of Financial Condition and
Results of Operations and other financial information set forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........... $88,560 $109,364 $144,933 $188,202 $243,969 $175,989 $225,195
Cost of goods
sold............. 60,833 75,823 100,672 127,917 166,326 120,017 152,339
------- -------- -------- -------- -------- -------- --------
Gross profit........ 27,727 33,541 44,261 60,285 77,643 55,972 72,856
Operating
expenses......... 25,064 28,511 33,026 40,658 52,761 38,217 50,425
------- -------- -------- -------- -------- -------- --------
Operating income.... 2,663 5,030 11,235 19,627 24,882 17,755 22,431
Interest and
other............ -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Income before income
taxes............ 2,663 5,030 11,235 19,627 24,882 17,755 22,431
Provision for income
taxes............ 1,235 2,114 4,522 7,799 9,819 7,019 8,812
------- -------- -------- -------- -------- -------- --------
Net income.......... $ 1,428 $ 2,916 $ 6,713 $ 11,828 $ 15,063 $ 10,736 $ 13,619
======= ======== ======== ======== ======== ======== ========
Pro forma net income
per share(1)..... $0.71 $0.64
======== ========
Pro forma weighted
average shares
outstanding(1)... 21,272 21,272
======== ========
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<TABLE>
<CAPTION>
MARCH 31, 1997
---------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital............................................................. $ 85,640
Total assets................................................................ 138,132
Shareholders' equity(2)..................................................... 111,378
</TABLE>
8
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FISCAL YEAR ENDED JUNE 30, NINE MONTHS
------------------------------------------------------------------ ENDED
1992 1993 1994 1995 1996 MARCH 31, 1997
---------- ---------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Active direct
marketing
customers(3)(4)..... 41,000 47,000 48,000 59,000 71,000 81,000
Number of SKUs(4)..... 40,000 50,000 60,000 70,000 80,000 100,000
Number of publications
per year............ 5 6 6 9 13 11
Total number of
publications
mailed.............. 542,000 1,416,000 1,403,000 2,285,000 3,048,000 2,724,000
Direct-mail
costs(5)............ $1,354,000 $1,551,000 $1,401,000 $2,261,000 $3,622,000 $3,175,000
Showroom and
distribution
facilities(4)....... 5 6 7 12 19 24
Full Service Supply
Programs:
Customers(3)(4)..... 9 16 21 29 42 51
Site locations(4)... 32 46 54 69 86 104
</TABLE>
- ---------
(1) Gives effect to (i) the issuance after March 31, 1997 of 20,897,000 shares
of Class B Common Stock to Kennametal for all periods presented and (ii) the
assumed issuance for fiscal 1996 and the nine months ended March 31, 1997 of
375,353 shares of Class A Common Stock to fund the excess of dividends over
net income for the nine months ended March 31, 1997.
(2) During the periods presented, the Company paid no cash dividends.
(3) Number of customers that have purchased products from the Company within the
12 months preceding the relevant period end.
(4) Represents data at period end.
(5) Direct-mail costs include production and mailing costs.
9
<PAGE> 11
RISK FACTORS
Prospective investors should consider, in addition to the other information
set forth elsewhere in this Prospectus, the following matters in evaluating the
Company and the Class A Common Stock offered hereby.
CONTROL BY KENNAMETAL
Kennametal is currently the only shareholder of the Company. Upon
completion of the Offering, Kennametal will own 100% of the outstanding Class B
Common Stock of the Company (which Class B Common Stock entitles its holders to
10 votes per share on any matter submitted to a vote of the Company's
shareholders). The Class B Common Stock will represent approximately 98.0% of
the combined voting power of all classes of voting stock of the Company (97.6%
if the Underwriters' over-allotment option is exercised in full) and thus will
be able to direct the election of all of the members of the Company's Board of
Directors and exercise a controlling influence over the business and affairs of
the Company, including any determinations with respect to mergers or other
business combinations, the acquisition or disposition of assets, the incurrence
of indebtedness, the issuance of any additional Common Stock or other equity
securities and the payment of dividends with respect to the Common Stock.
Similarly, Kennametal will have the power to determine matters submitted to a
vote of the Company's shareholders without the consent of the Company's other
shareholders, will have the power to prevent a change of control of the Company
and could take other actions that might be favorable to Kennametal. Kennametal
has advised the Company that its current intent is to continue to hold all of
its Class B Common Stock. There can be no assurance, however, concerning the
period of time during which Kennametal will maintain its beneficial ownership of
Common Stock. Pursuant to the Purchase Agreement (as defined herein), Kennametal
will agree, subject to certain exceptions, not to sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock owned by it for a period of
180 days after the date of this Prospectus without the prior written consent of
the representatives of the Underwriters. For so long as Kennametal maintains
beneficial ownership of at least 40% of the number of outstanding shares of
Common Stock, the Company may not act in a way which may reasonably be
anticipated to result in a contravention by Kennametal of Kennametal's Articles
of Incorporation or credit or other material agreement. Kennametal will have the
right upon any issuance of shares of Class A Common Stock to purchase additional
shares of Common Stock in order to maintain its ownership percentage. See
"Relationship with Kennametal--Corporate Agreement."
The Company's Board of Directors consists of seven members, four of whom
serve concurrently as members of the Board of Directors of Kennametal, including
Robert L. McGeehan, President and Chief Executive Officer of Kennametal. In
light of its ownership of the Company's Class B Common Stock, Kennametal will
have the ability to change the size and composition of the Company's Board of
Directors and committees of the Board of Directors. See "Relationship with
Kennametal--General."
As of the date of this Prospectus, Kennametal has no current plan or
intention other than to hold its shares of Class B Common Stock for the
foreseeable future. After the date of the Offering, options which may be
considered by Kennametal regarding its interest in the Company include whether
to sell all or a portion of its shares of Common Stock to the public in a
subsequent public offering or to a strategic investor or to distribute pro rata
to Kennametal's shareholders its remaining shares of Common Stock by a dividend
intended to be tax-free for federal income tax purposes to Kennametal and
Kennametal's shareholders. See "Description of Capital Stock--Common
Stock--Conversion." Kennametal also has the right to require the Company to
register for sale under applicable securities laws all of the shares of Common
Stock (including any shares of Class A Common Stock acquired by Kennametal upon
conversion of the Class B Common Stock) which Kennametal or its subsidiaries
hold. See "Relationship with Kennametal--Corporate Agreement."
NO ASSURANCE THAT GROWTH MAY BE SUSTAINED
The Company has grown rapidly over the past several years as a result of
the addition of distribution centers, warehouses and showrooms, expanded
metalworking product offerings in its master catalog, more effective marketing
campaigns and new customers and site locations for its Full Service Supply
Programs. The
10
<PAGE> 12
Company believes that part of its success has been due to the metalworking focus
of its catalog, which the Company intends to maintain. This focus, however,
could limit the ability of the Company to continue expanding its product
offerings, because there are a limited number of SKUs or metalworking products
remaining that the Company does not already offer to its customers.
Additionally, the Company believes that there are numerous suitable locations
for development of distribution centers, warehouses and showrooms, although
there can be no assurance that any new facilities will result in increased
sales. Similarly, no assurance can be given that the Company's marketing
campaigns will continue to result in increased sales. The Company's growth has
and will continue to place increasing demands on the Company's management
resources and on its need to attract and retain skilled employees. The Company's
future growth prospects are dependent upon a number of these factors, many of
which are not in the control of the Company. As a result, there can be no
assurance that the Company will be able to continue to grow profitably.
LARGE CUSTOMERS
The Full Service Supply Programs are targeted at the needs of large
industrial customers who purchase large amounts of metalworking consumables and
related products for their manufacturing facilities. Consequently, a small
number of customers, utilizing Full Service Supply Programs at several or all of
their manufacturing facilities, could generate a substantial portion of the
Company's net sales. The Company's Full Service Supply Programs generally are
pursuant to arrangements without a stated term and, therefore, can be terminated
by either the Company or the customer on reasonable notice, subject to
negotiation of disengagement terms. As a result, although a majority of the
Company's Full Service Supply Programs have remained in effect from year to
year, there can be no assurance that the Company or the customer will not
terminate these agreements, which could have a material adverse effect on the
Company's financial condition and results of operations. For example, following
extensive negotiations in early 1997 with General Electric Corporation ("GE"),
during which the Company determined that it was not in its best interest to
accede to certain price concessions requested by GE, GE gave notice of
termination of its agreement with the Company under which the Company had net
sales of $39.6 million during the nine months ended March 31, 1997. No other
customer accounted for more than 6% of the Company's net sales during that
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Termination of Large Contract."
CONFLICTS OF INTEREST
Common Directors. Various conflicts of interest between the Company and
Kennametal may arise in the future in a number of areas relating to their past
and ongoing relationships, including potential acquisitions of businesses or
properties, potential competitive business activities, the election of new or
additional directors, payment of dividends, incurrence of indebtedness, tax
matters, financial commitments, marketing functions, indemnity arrangements,
registration rights, administration of benefit plans, service arrangements,
issuances of capital stock of the Company, sales or distribution by Kennametal
of its remaining shares of Common Stock and the exercise by Kennametal of its
ability to control the management and affairs of the Company. In addition, there
are overlapping directors between the Company and Kennametal. Robert L.
McGeehan, a director of the Company, is a director and the Chief Executive
Officer of Kennametal, the Company's Chairman of the Board, William R. Newlin,
is also the Chairman of the Board of Kennametal and Richard C. Alberding and
Aloysius T. McLaughlin, Jr., who are directors of the Company, are also
directors of Kennametal. See "Management." The Company has not instituted any
formal plan or arrangement to address potential conflicts of interest that may
arise between the Company and Kennametal. The Company's directors intend to
exercise reasonable judgment and take such steps as they deem necessary under
all of the circumstances in resolving any specific conflict of interest that may
occur and will determine what, if any, specific measures may be necessary or
appropriate in light of their fiduciary duties under state law, including
whether to have any specific matter approved by a majority vote of the
disinterested directors. There can be no assurance that any conflicts will be
resolved in favor of the Company.
Future Arrangements; Joint Liabilities. The Company and Kennametal have
entered into a number of agreements for the purpose of defining the ongoing
relationship between them. Pursuant to these arrange-
11
<PAGE> 13
ments, Kennametal will provide benefits to the Company that it might not provide
to a third party, and there is no assurance that the terms and conditions of any
future arrangements between Kennametal and the Company will be as favorable to
the Company as in effect now. In addition, notwithstanding the Tax Sharing
Agreement (as defined herein), under the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and federal income tax law, each member of a
consolidated group (for federal income tax and ERISA purposes) is also jointly
and severally liable for the federal income tax liability, benefit plan funding
and termination liabilities, certain benefit plan taxes and certain other
liabilities of each other member of the consolidated group. Similar rules may
apply under state income tax laws. See "Relationship with Kennametal."
Competition; Product Supply; Corporate Opportunities. In addition, to
address the potential for conflicts between the Company and Kennametal, the
Company's articles of incorporation (the "Articles of Incorporation" or
"Articles") contain detailed provisions concerning the business activities in
which the Company is permitted to engage and prohibiting the Company from
competing with Kennametal until the day after the third annual shareholder
meeting held following the date upon which Kennametal and its affiliates (other
than the Company or its subsidiaries) no longer beneficially own in the
aggregate 40% or more of the Common Stock (such date upon which Kennametal and
such affiliates cease to own such percentage of Common Stock, the "Control
Termination Date"). The relevant provisions are intended to permit the Company
to continue all activities in which it currently engages, and to expand into
certain related distribution products and markets. The pertinent provisions of
the Articles of Incorporation are set forth under "Description of Capital
Stock-- Limitations on the Company's Business Activities." These provisions
generally permit the Company to continue distributing metalworking consumables
and related products to industrial customers through direct marketing and
integrated supply programs and to continue to provide integrated supply
services. The Company may also engage in any other business with Kennametal's
consent or as authorized by a majority vote of Kennametal's shareholders. The
Articles further require the Company to purchase from Kennametal, unless
Kennametal otherwise consents, all of its direct marketing requirements for
metalworking tools, inserts and related products available from Kennametal. The
Company's Articles of Incorporation also provide that no opportunity,
transaction, agreement or other arrangement to which Kennametal, or an entity in
which Kennametal has an interest, is a party, may be a corporate opportunity of
the Company unless such opportunity, transaction, agreement or other arrangement
was initially offered to the Company before it is offered to Kennametal or such
other entity, and either (i) the Company has an enforceable contractual interest
in such opportunity, transaction, agreement or other arrangement or (ii) the
subject matter of such opportunity, transaction, agreement or other arrangement
is a constituent element of an activity in which the Company is then actively
engaged. Even if the foregoing conditions were met, such fact alone would not
conclusively render such opportunity the property of the Company.
Tax-Sharing. Because of its controlling interest in the Company and the
terms of the tax-sharing agreement to be entered into between the Company and
Kennametal (the "Tax-Sharing Agreement"), Kennametal will effectively control
all of the Company's tax decisions. Under the Tax-Sharing Agreement, Kennametal
will have sole authority to respond to and conduct all tax proceedings
(including tax audits) relating to the Company and to file all returns on behalf
of the Company. The amount of the Company's liability to (or entitlement to
payment from) Kennametal under the Tax-Sharing Agreement will equal the amount
of taxes that the Company would owe (or refund that it would receive) had it
prepared tax returns on a stand-alone basis. See "Relationship with
Kennametal--Tax-Sharing Agreement." This arrangement may result in conflicts of
interest between the Company and Kennametal. For example, under the Tax-Sharing
Agreement, Kennametal may choose to contest, compromise or settle any adjustment
or deficiency proposed by the relevant taxing authority in a manner that may be
beneficial to Kennametal and detrimental to the Company. Each member of a
consolidated group is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. Accordingly, although
the Tax-Sharing Agreement allocates tax liabilities between the Company and
Kennametal, during the period in which the Company is included in Kennametal's
consolidated group, the Company could be liable in the event that any federal
tax liability is incurred, but not discharged, by any other member of
Kennametal's consolidated group.
12
<PAGE> 14
INTERCOMPANY AGREEMENTS NOT SUBJECT TO ARM'S LENGTH NEGOTIATION
Kennametal and the Company have entered and intend to enter into certain
intercompany agreements relating to services that are material to the Company's
business. These agreements include the provision by Kennametal of various
services to the Company and the sale of Kennametal products, as well as the Tax-
Sharing Agreement. Pursuant to the Services Agreement (as defined herein), the
relationship between Kennametal and the Company will continue in a manner
generally consistent with past practices. See "Relationship with Kennametal."
Because the Company is a wholly owned subsidiary of Kennametal, none of these
agreements will result from arm's length negotiations and, therefore, the prices
charged to the Company for services provided thereunder may be higher or lower
than prices that may be charged by third parties.
DEPENDENCE ON KENNAMETAL AND KENNAMETAL INFORMATION SYSTEMS
The Company believes that a significant factor contributing to its growth
has been its affiliation with Kennametal, the largest North American provider of
metalcutting tools and tooling systems. The Company also relies upon and markets
its access to Kennametal's research and technical expertise in tooling products
and supplies. In addition, the proprietary computer software programs of
Kennametal which the Company uses are an integral part of the Company's business
and growth strategies. The Company depends upon Kennametal's information systems
generally to process orders, to manage inventory and accounts receivable
collections, to purchase, sell and ship products efficiently and on a timely
basis, to maintain cost-effective "just-in-time" operations and to provide
reliable service to its customers. Although the Company has entered into various
service agreements with Kennametal, there can be no assurance of its continued
relationship with Kennametal or that a disruption will not occur in Kennametal's
information systems. Any such disruption could have a material adverse effect on
the Company's financial condition and results of operations, including as a
result of Kennametal's implementation of SAP/R3, a new client-server information
system. See "Relationship with Kennametal" and "Business--Information Systems."
INTERNATIONAL EXPANSION
The Company began its direct marketing operations in the United Kingdom in
fiscal 1995. The Company anticipates that it will launch additional
direct-marketing efforts and open showrooms in the United Kingdom, Germany and
certain other European countries over the next five years and is considering
direct marketing in certain other countries. Additionally, the Company is
planning to introduce its Full Service Supply Programs in the United Kingdom and
Germany. Expansion into international markets will involve risks relating to
currency exchange rates, new and different legal, tax, accounting and regulatory
requirements, difficulties in staffing and managing foreign operations,
operating difficulties and other factors.
COMPETITION
The metalworking supply industry is a large, fragmented industry that is
highly competitive. The Company faces competition (i) in the small and
medium-sized metalworking markets from traditional channels of distribution such
as retail outlets, small dealers, regional or national distributors utilizing
direct sales forces, and manufacturers' representatives and (ii) in the large
industrial metalworking market from large distributors and other companies which
offer varying degrees and types of integrated industrial supply programs. The
Company believes that sales of metalworking industrial supplies will become more
concentrated over the next few years, which may increase opportunities for the
Company to use its market leadership position to grow through expansion.
Consolidation, however, could increase the competitiveness of the industry in
ways that could harm the Company's profitability and growth prospects. Certain
of the Company's competitors offer a greater variety of products (including
nonmetalworking products) and have substantially greater financial and other
resources than the Company. See "Business--Competition."
INDUSTRY CYCLICALITY
Some of the primary markets for the products sold by the Company are
subject to cyclical fluctuations. Consequently, the demand for products has been
and may be influenced by many of the same national and
13
<PAGE> 15
regional factors which affect demand for industrial and consumer durable goods,
including consumer confidence, interest rates and general economic conditions.
Changes in economic conditions resulting in a change in the current business
cycle could have a material adverse effect on the Company's results of
operations and financial condition.
INTEGRATION OF ACQUISITIONS
In April and May, 1997, the Company completed the Strelinger Acquisition
and the M&A Acquisition, respectively. An element of the Company's strategy is
to make selected, strategic acquisitions which complement its existing
operations. The Company does not have a history of completing and integrating
acquisitions, including the Strelinger Acquisition and the M&A Acquisition.
There can be no assurance that the Company will be able to locate suitable
acquisition candidates successfully or complete and integrate such acquisitions.
In addition, acquisitions involve a number of special risks, including adverse
short-term effects on reported operating results, the diversion of management's
attention, the dependence on retention, hiring and training of key personnel,
the amortization of acquired intangible assets and risks associated with
unanticipated problems or legal liabilities, some or all of which could have a
material adverse effect on the Company's results of operations and financial
condition.
DEPENDENCE ON KEY MANAGEMENT
The Company's success will continue to depend to a significant extent on
its executive officers and other key members of management. There can be no
assurance that the Company will be able to retain its executive officers and key
personnel or attract additional qualified members of management in the future.
The loss of the services of any of the key managers could have a material
adverse effect upon the Company's business. The Company currently does not have
"key man" insurance on any of these individuals.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 4,257,000 shares
of Class A Common Stock issued and outstanding (4,897,000 if the Underwriters'
over-allotment option is exercised in full) and 20,897,000 shares of Class B
Common Stock issued and outstanding (20,257,000 if the Underwriters' over-
allotment option is exercised in full). The shares of Class A Common Stock being
offered hereby will be freely tradable (other than by an "affiliate" of the
Company, as such term is defined in the Securities Act) without restriction
under the Securities Act. Upon consummation of the Offering, Kennametal will own
all of the shares of Class B Common Stock outstanding, each of which is
convertible, under certain circumstances, into one share of Class A Common
Stock. See "Description of Capital Stock--Common Stock--Conversion." The shares
held by Kennametal will be eligible for public sale if registered under the
Securities Act or otherwise sold in accordance with applicable securities laws,
including Rule 144. For a description of the requirements of Rule 144, including
volume and method of sale restrictions contained therein, see "Shares Eligible
for Future Sale." In connection with the Offering, the Company and Kennametal
have entered into certain "lockup" agreements for 180 days with the
Underwriters. See "Underwriting." In addition, the Company has granted, upon
consummation of the Offering, stock options to purchase an aggregate of 450,000
shares of Class A Common Stock which generally are exercisable one year from the
date of grant. The issuances of the shares of Class A Common Stock underlying
such options are expected to be registered and, therefore, such shares will be
freely tradable upon receipt. No predictions can be made as to the effect, if
any, that future sales of Common Stock or the availability of such shares for
sale will have on the prevailing market prices of the Class A Common Stock
following the Offering. Sales of substantial amounts of Common Stock in the
public market, or the perception that such sales could occur, could adversely
affect prevailing market prices for Class A Common Stock. See "Shares Eligible
for Future Sale." In addition, the Company has agreed to use its best efforts to
effect the registration under applicable federal and state securities laws of
any of the Common Stock held by Kennametal. See "Relationship with
Kennametal--Corporate Agreement."
14
<PAGE> 16
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock. There can be no assurance that an active trading market for the
Class A Common Stock will develop or be sustained. The initial public offering
price of the Class A Common Stock offered hereby will be determined by
negotiations between the Company and the Underwriters and may not be indicative
of the market price for the Class A Common Stock following the Offering. No
predictions can be made as to the effect, if any, that future market sales of
Class A Common Stock or the availability of Class A Common Stock for sale will
have on the prevailing market prices of the Class A Common Stock following the
Offering. For a discussion of the factors considered in determining the initial
public offering price, see "Underwriting."
The market price for shares of the Class A Common Stock may be volatile and
may fluctuate based upon a number of factors including, without limitation, the
Company's operating performance, news announcements or changes in general
economic and market conditions. In addition, the stock market in recent years
has experienced extreme price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
fluctuations may adversely affect the market price of the Class A Common Stock.
ABSENCE OF DIVIDENDS
The Company intends to retain its future earnings to finance the
development, expansion and growth of its business and does not presently intend
to pay cash dividends to the holders of Class A Common Stock in the foreseeable
future. The payment of future dividends on the Class A Common Stock, if any,
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements, the
general financial condition of the Company, general business conditions and
limitations imposed by Pennsylvania law. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Class A Common Stock in the Offering will experience
immediate dilution of $11.56 per share of Class A Common Stock in the net
tangible book value of their Class A Common Stock from the initial public
offering price (assuming an initial public offering price of $17.00 per share,
the midpoint of the range set forth on the cover page of this Prospectus). Prior
to consummation of the Offering, the Company's net tangible book value per share
of Common Stock will be $3.33, whereas upon consummation of the Offering, it
will be $5.44. This will result in an increase in net tangible book value of
$2.11 per share of Class B Common Stock that will be received by Kennametal
attributable to the Offering. See "Dilution."
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Articles and the By-Laws of the Company (the
"By-Laws") may have the effect of delaying, deferring or preventing a change of
control of the Company that would be operative with respect to an extraordinary
corporate transaction involving the Company, such as a merger, reorganization,
tender offer, sale or transfer of substantially all of its assets or
liquidation. These provisions might discourage a potentially interested
purchaser from attempting a unilateral takeover bid for the Company on terms
which some shareholders might favor. Although the Company does not believe that,
by discouraging potential takeover bids, these provisions will depress the price
of the Common Stock, these provisions might diminish the opportunity for the
shareholders of the Company to sell their shares at a premium over then
prevailing market prices. Such provisions include (i) a classified board of
directors following a Control Termination Date as defined herein, (ii) advance
notice requirements for shareholder proposals and nominations (other than by
Kennametal), (iii) limitation on the ability of shareholders (other than
Kennametal) to call special shareholder meetings and (iv) limitation on the
ability of shareholders (other than Kennametal) to remove directors. For
discussion of such provisions, see "Description of Capital Stock."
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds from the Offering, after deducting estimated underwriting
discounts and expenses, are estimated to be approximately $66.1 million (or
approximately $76.2 million if the Underwriters' over-allotment option is
exercised in full) and will be used: (i) to repay $20.0 million of indebtedness
related to a dividend paid to Kennametal on April 28, 1997, (ii) to repay
amounts due to Kennametal totaling approximately $19.0 million, of which
approximately $14 million relates to acquisitions, $3 million relates to income
taxes and $2 million relates to employee benefit obligations, (iii) to spend $15
to $20 million to acquire or construct a new Midwest distribution center in the
Detroit, Michigan metropolitan area, which is expected to be approximately
200,000 to 250,000 square feet in size and should be in operation by June 30,
1999, (iv) to provide working capital for new showrooms and Full Service Supply
Programs and (v) to fund acquisitions. Pending such uses, the net proceeds will
be loaned to Kennametal in exchange for a note bearing interest at a fluctuating
rate equal to Kennametal's short term borrowing costs which provides for the
repayment of amounts due thereunder upon demand by the Company. Kennametal's
short term borrowing rate during April 1997 was approximately 5.8%. Kennametal
will maintain unused lines of credit to enable it to repay any portion or all of
such loans upon demand by the Company. See "Relationship with Kennametal--
Intercompany Debt/Investment and Cash Management Agreement."
DIVIDEND POLICY
The Company intends to retain its future earnings to finance the
development, expansion and growth of its business and does not presently intend
to pay cash dividends to the holders of Class A Common Stock in the foreseeable
future. The payment of future dividends on the Class A Common Stock, if any,
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements, the
general financial condition of the Company, general business conditions and
limitations imposed by Pennsylvania law.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 and as adjusted to reflect the sale of the shares of Class A
Common Stock offered hereby at an assumed initial public offering price of
$17.00 per share (the midpoint of the range set forth on the cover page of this
Prospectus) and the application of the net proceeds therefrom (assuming that the
Underwriters' over-allotment option is not exercised). See "Use of Proceeds."
The information set forth in this table should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
----------------------------------
ACTUAL AS ADJUSTED(1)
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term note receivable from Kennametal(2)................ $ -- $ 27,073
Capitalization:
Long-term debt(3)............................................ -- --
Shareholders' equity:
Preferred Stock, $.01 par value; 25,000,000 shares
authorized; no shares issued and outstanding............ -- --
Class A Common Stock, $.01 par value; 75,000,000 shares
authorized; 4,257,000 shares issued and
outstanding(4).......................................... -- 43
Class B Common Stock, $.01 par value; 50,000,000 shares
authorized; 20,897,000 shares issued and
outstanding(5).......................................... -- 209
Additional paid-in capital(5)(6)........................... -- 157,065
Investments by and advances from Kennametal(5)............. 111,244 --
Translation adjustment..................................... 134 134
-------- --------
Total shareholders' equity(4)......................... 111,378 157,451
-------- --------
Total capitalization............................. $111,378 $157,451
======== ========
</TABLE>
- ---------
(1) The net proceeds from the Offering, after deducting estimated underwriting
discounts and expenses, are estimated to be approximately $66.1 million (or
approximately $76.2 million if the Underwriters' over-allotment option is
exercised in full) and will be used: (i) to repay $20.0 million of
indebtedness related to a dividend paid to Kennametal on April 28, 1997,
(ii) to repay amounts due to Kennametal totaling approximately $19.0 million
relating to acquisitions, income taxes and employee benefit obligations,
(iii) to acquire or construct a new Midwest distribution center, (iv) to
provide working capital for new showrooms and Full Service Supply Programs
and (v) to fund acquisitions. Pending such uses, the net proceeds will be
loaned to Kennametal. See "Use of Proceeds."
(2) Pending the use of proceeds described above, the net proceeds will be loaned
to Kennametal in exchange for a note bearing interest at a fluctuating rate
equal to Kennametal's short-term borrowing costs which provides for the
repayment of amounts due thereunder upon demand by the Company. Kennametal's
short-term borrowing rate during April 1997 was approximately 5.8%.
Kennametal will maintain unused lines of credit to enable it to repay any
portion or all of such loans upon demand by the Company. See "Use of
Proceeds."
(3) Does not include amounts borrowed on April 25, 1997 under J&L's line of
credit of $20.0 million to fund a dividend to Kennametal. Upon completion of
this Offering, a portion of the net proceeds will be used to repay the
borrowings under the line of credit.
(4) Does not include 450,000 shares of Class A Common Stock issuable upon
exercise of stock options that will be granted to executive officers and
directors of the Company upon consummation of the Offering. Such options
will be subject to a one-year vesting period. See "Management--Executive
Compensation" and "-- JLK Direct Distribution Inc. 1997 Stock Option and
Incentive Plan."
(5) Reflects the exchange of investments by and advances from Kennametal for
20,897,000 shares of Class B Common Stock.
(6) Reflects a reduction of $20.0 million for the dividend to Kennametal on
April 28, 1997.
17
<PAGE> 19
DILUTION
The net tangible book value of the Company as of March 31, 1997 would have
been $70.9 million, or $3.33 per share of Common Stock, based upon 20,897,000
shares of Class B Common Stock outstanding and giving effect to the $20.0
million dividend to Kennametal on April 28, 1997 and the assumed issuance of
375,353 shares of Class A Common Stock to fund the excess of such dividend over
net income for the nine months ended March 31, 1997. Net tangible book value per
share is equal to the Company's total tangible assets less total liabilities,
divided by the number of shares of Common Stock deemed outstanding. After giving
effect to the Offering (at an assumed initial public offering price of $17.00
per share, the midpoint of the range set forth on the cover page of this
Prospectus and less estimated underwriting discounts and expenses of $6.3
million payable by the Company in connection with the Offering), the net
tangible book value of the Company as of March 31, 1997 would have been $136.9
million, or $5.44 per share of Common Stock. This represents an immediate
increase in net tangible book value of $2.11 per share of Common Stock and an
immediate dilution of $11.56 per share to purchasers of the shares of Class A
Common Stock in the Offering ("New Investors"). "Dilution per share" represents
the difference between the price per share to be paid by New Investors for the
shares of Class A Common Stock issued in the Offering and the net tangible book
value per share as of March 31, 1997. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1)................ $17.00
Net tangible book value per share of Common Stock before the
Offering(2).................................................. $ 3.33
Increase per share attributable to New Investors................ 2.11
------
Net tangible book value per share after the Offering(2)........... 5.44
------
Dilution per share to New Investors............................... $11.56
======
</TABLE>
The following table summarizes as of March 31, 1997 the differences between
Kennametal and the New Investors with respect to the number of shares held by,
the voting rights of the total investment in the Company of, and the average
cost per share paid by Kennametal and the New Investors purchasing shares of
Class A Common Stock in the Offering:
<TABLE>
<CAPTION>
SHARES HELD TOTAL INVESTMENT
-------------------------------------- --------------------------------------
PERCENTAGE VOTING PERCENTAGE AVERAGE
OF THE RIGHTS OF COST PER
NUMBER COMPANY PERCENTAGE AMOUNT INVESTMENT SHARE
---------- ---------- ---------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Kennametal.............. 20,897,000 83.1% 98% $ 70,866,000 49.5% $ 3.39
New Investors........... 4,257,000 16.9 2 72,369,000 50.5 17.00
---------- ----- --- ------------ -----
Total(2).............. 25,154,000 100.0% 100% $143,235,000 100.0%
========== ===== ============ =====
</TABLE>
- ---------
(1) Before deducting estimated underwriting discounts and expenses of the
Offering payable by the Company.
(2) Does not include 450,000 shares of Class A Common Stock issuable upon
exercise of stock options that will be granted to executive officers and
directors of the Company upon consummation of the Offering. Such options
will be subject to a one-year vesting period. See "Management--Executive
Compensation" and "--JLK Direct Distribution Inc. 1997 Stock Option and
Incentive Plan."
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated income statement and balance sheet data for the
Company presented below are derived from the Company's Consolidated Financial
Statements. The Company's Consolidated Financial Statements as of and for the
fiscal years ended June 30, 1994, 1995 and 1996 have been audited by Arthur
Andersen LLP. The Consolidated Financial Statements as of and for the nine
months ended March 31, 1996 and 1997 are derived from the Company's unaudited
interim financial statements appearing elsewhere in this Prospectus, which in
the opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary to state fairly the data included therein in
accordance with generally accepted accounting principles for interim financial
information. Results for the nine months ended March 31, 1997 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year. The financial information for the fiscal years ended 1992 and 1993
is derived from the Company's unaudited Consolidated Financial Statements. The
selected financial information presented below should be read in conjunction
with, and is qualified by reference to, the more detailed information in the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus, Management's Discussion and Analysis of Financial Condition and
Results of Operations and other financial information set forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
--------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................. $88,560 $109,364 $144,933 $188,202 $243,969 $175,989 $225,195
Cost of goods sold........ 60,833 75,823 100,672 127,917 166,326 120,017 152,339
------- -------- -------- -------- -------- -------- --------
Gross profit.............. 27,727 33,541 44,261 60,285 77,643 55,972 72,856
Operating expenses........ 25,064 28,511 33,026 40,658 52,761 38,217 50,425
------- -------- -------- -------- -------- -------- --------
Operating income.......... 2,663 5,030 11,235 19,627 24,882 17,755 22,431
Interest and other........ -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 2,663 5,030 11,235 19,627 24,882 17,755 22,431
Provision for income
taxes.................. 1,235 2,114 4,522 7,799 9,819 7,019 8,812
------- -------- -------- -------- -------- -------- --------
Net income................ $ 1,428 $ 2,916 $ 6,713 $ 11,828 $ 15,063 $ 10,736 $ 13,619
======= ======== ======== ======== ======== ======== ========
Pro forma net income per
share(1)............... $ 0.71 $ 0.64
======== ========
Pro forma weighted average
shares
outstanding(1)......... 21,272 21,272
======== ========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................... $41,135 $44,394 $50,670 $51,945 $ 73,263 $ 85,640
Total assets...................... 83,050 85,835 92,059 98,893 121,045 138,132
Shareholders' equity(2)........... 73,283 73,815 76,807 76,722 97,991 111,378
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, NINE MONTHS
---------------------------------------------------------------- ENDED
1992 1993 1994 1995 1996 MARCH 31, 1997
---------- ---------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Active direct marketing
customers(3)(4).......... 41,000 47,000 48,000 59,000 71,000 81,000
Number of SKUs(4).......... 40,000 50,000 60,000 70,000 80,000 100,000
Number of publications per
year..................... 5 6 6 9 13 11
Total number of
publications mailed.... 542,000 1,416,000 1,403,000 2,285,000 3,048,000 2,724,000
Direct-mail costs(5)....... $1,354,000 $1,551,000 $1,401,000 $2,261,000 $3,622,000 $3,175,000
Showroom and distribution
facilities(4)............ 5 6 7 12 19 24
Full Service Supply
Programs:
Customers(3)(4).......... 9 16 21 29 42 51
Site locations(4)........ 32 46 54 69 86 104
</TABLE>
- ---------
(1) Gives effect to (i) the issuance after March 31, 1997 of 20,897,000 shares
of Class B Common Stock to Kennametal for all periods presented and (ii) the
assumed issuance for fiscal 1996 and the nine months ended March 31, 1997 of
375,353 shares of Class A Common Stock to fund the excess of dividends over
net income for the nine months ended March 31, 1997.
(2) During the periods presented, the Company paid no cash dividends.
(3) Number of customers that have purchased products from the Company within the
12 months preceding the relevant period end.
(4) Represents data at period end.
(5) Direct-mail costs include production and mailing costs.
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The accompanying financial information of the Company includes the
operations of the direct-marketing industrial supply business, namely J&L
America, Inc. ("J&L"), a wholly owned subsidiary of Kennametal, and the
integrated industrial supply programs ("Full Service Supply Programs") business
of Kennametal prior to the Contribution. Prior to April 1, 1997, the Company had
no separate legal status or existence. Kennametal incorporated the Company as a
Pennsylvania corporation on April 28, 1997. Immediately prior to the Offering,
20,897,000 shares of Class B Common Stock will be issued to Kennametal in
exchange for its investment in the Company. The Company and Kennametal will
operate as separate companies.
The following discussion should be read in connection with the Consolidated
Financial Statements of the Company and the related notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------------------------------
NINE MONTHS
FISCAL YEAR ENDED JUNE ENDED
30, MARCH 31,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................. 69.5 68.0 68.2 68.2 67.6
----- ----- ----- ----- -----
Gross margin................................... 30.5 32.0 31.8 31.8 32.4
Operating expenses............................. 22.8 21.6 21.6 21.7 22.4
----- ----- ----- ----- -----
Operating income............................... 7.7 10.4 10.2 10.1 10.0
Interest and other............................. -- -- -- -- --
----- ----- ----- ----- -----
Income before income taxes..................... 7.7 10.4 10.2 10.1 10.0
Provision for income taxes..................... 3.1 4.1 4.0 4.0 3.9
----- ----- ----- ----- -----
Net income..................................... 4.6% 6.3% 6.2% 6.1% 6.1%
===== ===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31, 1996
Net Sales. Net sales for the nine month period ended March 31, 1997 were
$225.2 million, an increase of 28% from $176.0 million for the nine month period
ended March 31, 1996. Net sales increased primarily because of the addition of
seven new showrooms, including a new distribution center, the addition of over
20,000 SKUs to the 1997 master catalog, which expanded the product offering to
100,000 SKUs and from the implementation of Full Service Supply Programs for 12
new customers covering 22 different facilities. Net sales also rose to a lesser
extent because of increased sales to new customers in the United Kingdom and the
continued ramp-up of existing Full Service Supply Programs. At March 31, 1997,
the Company operated a total of 24 showrooms, including six distribution centers
in the United States and one in the United Kingdom, and provided Full Service
Supply Programs to 51 customers covering 104 different facilities, as compared
to 17 showrooms, including five distribution centers, in the United States and
one in the United Kingdom, and Full Service Supply Programs for 39 customers
covering 82 facilities at March 31, 1996.
Gross Profit. Gross profit for the nine month period ended March 31, 1997
was $72.9 million, an increase of 30.2% from $56.0 million for the nine month
period ended March 31, 1996. Gross margin for the nine month period ended March
31, 1997 was 32.4% compared to 31.8% for the nine month period ended March 31,
1996. The gross margin improved due to a higher percentage of metalworking
products rather than related products sold to Full Service Supply Program
customers. This was partly offset by more frequent product promotions and
limited introductory pricing on products related to the opening of seven new
showrooms.
21
<PAGE> 23
Operating Expenses. Operating expenses for the nine month period ended
March 31, 1997 were $50.4 million, an increase of 31.9% from $38.2 million for
the nine month period ended March 31, 1996. Operating expenses as a percentage
of net sales were 22.4% for the nine month period ended March 31, 1997, compared
to 21.7% in the same period in fiscal 1996. Operating expenses as a percentage
of net sales increased as a result of higher costs associated with the start-up
of seven new showrooms, including a new distribution center, and new Full
Service Supply Programs for customers covering 22 different facilities. Such
start-up costs included those for additional product promotions, increased
direct mail costs and new customer marketing campaigns. Total costs for these
items also rose due to increased sales volume. Also included in operating
expenses were charges from Kennametal for warehousing, administrative, financial
and management information systems services provided to the Company. Charges
from Kennametal were $4.7 million for the nine month period ended March 31,
1997, an increase of 15.9% from $4.1 million for the nine month period ended
March 31, 1996. Charges from Kennametal as a percentage of net sales were 2.1%
for the nine month period ended March 31, 1997 compared to 2.3% in the same
period in fiscal 1996. The increase in total charges from Kennametal resulted
partly from higher start-up costs associated with a new client-server
information system needed to support higher sales volume. Such charges are
expected to decline slightly as a percentage of net sales in coming years.
Charges from Kennametal could increase in the future due to the additional costs
associated with operating as a public company. However, any such future
increases are not expected to be material.
Income Taxes and Net Income. The effective tax rate was 39.3% for the nine
month period ended March 31, 1997 compared to 39.5% in the same period in fiscal
1996. Net income increased 26.9% to $13.6 million for the nine month period
ended March 31, 1997, as a result of higher sales and an improved
gross margin, offset by higher operating expenses.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Net Sales. Net sales for fiscal 1996 were $244.0 million, an increase of
29.6% from $188.2 million in fiscal 1995. Net sales primarily increased due to
the addition of seven new showrooms, the addition of over 10,000 SKUs to the
1996 master catalog, bringing the total number of SKUs therein to 80,000 and
from the implementation of Full Service Supply Programs for 13 new customers
covering 17 different facilities. Net sales also increased to a lesser extent
because of additional direct marketing campaigns, from increased sales to new
customers in the United Kingdom and the continued ramp-up of existing Full
Service Supply Programs. At June 30, 1996, the Company operated a total of 19
showrooms, including five distribution centers in the United States and one in
the United Kingdom, and provided Full Service Supply Programs to 42 customers
covering 86 different facilities, as compared to 12 showrooms, including five
distribution centers, in the United States and one in the United Kingdom, and
Full Service Supply Programs for 29 customers covering 69 facilities at June 30,
1995.
Gross Profit. Gross profit for fiscal 1996 was $77.6 million, an increase
of 28.8% from $60.3 million in fiscal 1995. Gross margin for fiscal 1996 was
31.8% compared to 32.0% in fiscal 1995. The gross margin declined slightly as a
result of more frequent product promotions and limited introductory pricing on
products related to the opening of seven new showrooms. This decline was offset
in part by improved gross margins on Full Service Supply Programs due to a
higher percentage of sales of metalworking products rather than related products
sold to Full Service Supply Program customers in fiscal 1995.
Operating Expenses. Operating expenses for fiscal 1996 were $52.8 million,
an increase of 29.8%, from $40.7 million in fiscal 1995. Operating expenses as a
percentage of net sales were 21.6% in fiscal 1996, the same as in fiscal 1995.
Operating expenses increased partly as a result of higher costs associated with
the
start-up of seven new showrooms and new Full Service Supply Programs for
customers covering 17 different facilities. Such start-up costs included those
for increased direct mail costs and new customer marketing campaigns. Costs for
these items also rose due to increased sales volume. Operating costs also
increased due to higher costs for more frequently issued catalogs in the United
Kingdom than in fiscal 1995. Operating expenses, however, benefited from the
elimination of amortization of a non-compete agreement related to the
acquisition of J&L which became fully amortized in fiscal 1995. Charges from
Kennametal were $5.7 million in fiscal 1996, an increase of 62.6% from $3.5
million in fiscal 1995. Charges from Kennametal as a percentage
22
<PAGE> 24
of net sales were 2.3%, compared to 1.8% in fiscal 1995. The increase in these
charges as a percentage of net sales was attributable to the implementation of a
new client-server information system which commenced in fiscal 1995 and other
costs necessary to support higher sales volumes.
Income Taxes and Net Income. The effective tax rate was 39.5% in fiscal
1996 compared to 39.7% in fiscal 1995. Net income increased 27.4% to $15.1
million in fiscal 1996 as a result of higher sales, offset by a slightly lower
gross margin.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
Net Sales. Net sales for fiscal 1995 were $188.2 million, an increase of
29.9% from $144.9 million in fiscal 1994. Net sales primarily increased due to
the addition of five new showrooms, the addition of 10,000 SKUs to the 1995
master catalog, bringing the total number of SKUs therein to 70,000. Also,
during fiscal 1995, the Company launched its first catalog in the United Kingdom
which resulted in an increase in sales in that region. Net sales also rose to a
lesser extent because of the implementation of Full Service Supply Programs for
eight new customers covering 15 different facilities and from the continued
ramp-up of existing Full Service Supply Programs. At June 30, 1995, the Company
operated a total of 12 showrooms, including five distribution centers in the
United States and one in the United Kingdom, and provided Full Service Supply
Programs to 29 customers covering 69 different facilities, as compared to seven
showrooms, including five distribution centers in the United States, and Full
Service Supply Programs for 21 customers covering 54 facilities at June 30,
1994.
Gross Profit. Gross profit for fiscal 1995 was $60.3 million, an increase
of 36.2%, from $44.3 million in fiscal 1994. Gross margin for fiscal 1995 was
32.0% compared to 30.5% in fiscal 1994. The gross margin improved due to a
higher percentage of sales of metalworking products rather than related products
sold in conjunction with Full Service Supply Programs in fiscal 1994 and from
increased sales to existing mail order customers.
Operating Expenses. Operating expenses for fiscal 1995 were $40.7 million,
an increase of 23.1% from $33.0 million in fiscal 1994. Operating expenses as a
percentage of net sales were 21.6% in fiscal 1995, compared to 22.8% in fiscal
1994. Operating expenses increased as a result of higher costs associated with
the start-up of five new showrooms, and new Full Service Supply Programs for
customers covering 15 different facilities. Such start-up costs included those
for increased direct mail costs. Costs for these items also rose due to
increased sales volume. Operating expenses also increased due to expenditures
necessary to begin direct marketing operations in the United Kingdom. Operating
expenses benefited from lower amortization expense of a non-compete agreement
related to the acquisition of J&L as compared to fiscal 1994. Charges from
Kennametal were $3.5 million in fiscal 1995, an increase of 1.3% from $3.4
million in fiscal 1994. Charges from Kennametal as a percentage of net sales
were 1.8% in fiscal 1995, compared to 2.4% in fiscal 1994. The decrease in these
costs as a percentage of net sales was attributable to lower management
information systems costs.
Income Taxes and Net Income. The effective tax rate was 39.7% in fiscal
1995 compared to 40.2% in fiscal 1994. Net income increased 76.2% to $11.8
million in fiscal 1995 as a result of higher sales and an improved gross margin,
offset by higher operating expenses.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table sets forth summary unaudited quarterly financial
information for fiscal 1995 and 1996 and the first three quarters of fiscal
1997. In the opinion of management, such information has been prepared on the
same basis as the Consolidated Financial Statements appearing elsewhere in this
Prospectus and reflects all necessary adjustments (consisting of only normal
recurring adjustments) for a fair presentation of such unaudited quarterly
results when read in conjunction with the Consolidated Financial Statements and
23
<PAGE> 25
notes thereto. The operating results are not necessarily indicative of results
for any future period as there can be no assurance that any trends reflected in
such results will continue in the future.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL 1995:
Net sales................................... $ 40,771 $42,349 $53,358 $51,724
Gross profit................................ 12,892 13,482 17,246 16,665
Net income.................................. 2,511 2,480 3,887 2,950
FISCAL 1996:
Net sales................................... $ 52,853 $56,520 $66,616 $67,980
Gross profit................................ 16,586 18,018 21,368 21,671
Net income.................................. 2,784 3,090 4,862 4,327
Pro forma net income per share.............. $ 0.13 $ 0.15 $ 0.23 $ 0.20
FISCAL 1997:
Net sales................................... $ 70,018 $70,744 $84,433
Gross profit................................ 21,945 23,110 27,801
Net income.................................. 3,970 3,947 5,702
Pro forma net income per share.............. $ 0.19 $ 0.18 $ 0.27
</TABLE>
Seasonal variations do not have a major effect on the Company's business.
However, to varying degrees, traditional summer vacations and holidays often
affect the Company's sales levels during the first and second quarters of its
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the working capital
requirements necessitated by its sales growth, its showroom expansion program in
the United States, the addition of new products and Full Service Supply Programs
and its direct marketing activities in the United Kingdom. The Company's primary
sources of financing have been cash from operations and borrowings from
Kennametal. After completion of the Offering, the Company anticipates that its
cash flows from operations, coupled with available net proceeds from the
Offering, will be adequate to support its operations for the foreseeable future.
Net cash provided by (used in) operating activities was $12.8 million for
the nine month period ended March 31, 1997, $(3.3) million for the nine month
period ended March 31, 1996, and $(5.0) million, $18.2 million and $9.6 million
in fiscal 1996, 1995 and 1994, respectively. The increase in cash from
operations for the nine month period ended March 31, 1997 from the nine month
period ended March 31, 1996 resulted from higher net income and noncash
transactions for services provided by and paid for by Kennametal and from
improved utilization of working capital. The decrease in cash from operations
from fiscal 1995 to fiscal 1996 resulted from an increase in accounts receivable
and inventory related to additional SKUs, seven new showrooms and 13 new Full
Service Supply Programs, offset in part by higher net income and noncash
transactions for services provided by and paid for by Kennametal. The increase
in cash from operations from fiscal 1994 to fiscal 1995 was primarily due to
higher net income and noncash transactions for services provided by and paid for
by Kennametal, offset by increased working capital requirements due to increased
SKUs and the opening of five new showrooms and eight new Full Service Supply
Programs.
Net cash used in investing activities was $1.9 million for the nine month
period ended March 31, 1997 compared to $1.4 million for the nine month period
ended March 31, 1996 and $1.7 million, $0.9 million and $0.1 million in fiscal
1996, 1995 and 1994, respectively. These investments related primarily to
capital expenditures for improved information systems and office and computer
equipment to accommodate new product offerings and showroom openings.
Net cash provided by (used in) financing activities was $(5.1) million for
the nine month period ended March 31, 1997 compared to $(1.5) million for the
nine month period ended March 31, 1996 and
24
<PAGE> 26
$0.6 million, $(15.4) million and $(7.2) million in fiscal 1996, 1995 and 1994,
respectively. The increase in net cash payments to Kennametal for the nine month
period ended March 31, 1997 from the nine month period ended March 31, 1996 was
due to repayments to Kennametal for amounts previously advanced to the Company
for working capital needs. The decrease in net cash payments to Kennametal from
fiscal 1995 to fiscal 1996 was due to increased advances from Kennametal to the
Company to fund its working capital needs. The increase in net cash payments to
Kennametal from fiscal 1994 to fiscal 1995 was due to repayments to Kennametal
for amounts previously advanced to the Company for working capital needs.
The net proceeds from the Offering, after deducting estimated underwriting
discounts and expenses are estimated to be approximately $66.1 million (or
approximately $76.2 million if the Underwriters' over-allotment option is
exercised in full) and will be used: (i) to repay $20.0 million of indebtedness
related to a dividend paid to Kennametal on April 28, 1997, (ii) to repay
amounts due to Kennametal totaling approximately $19.0 million, of which
approximately $14 million relates to acquisitions, $3 million relates to income
taxes and $2 million relates to employee benefit obligations, (iii) to spend $15
to $20 million to acquire or construct a new Midwest distribution center in the
Detroit, Michigan metropolitan area, which is expected to be approximately
200,000 to 250,000 square feet in size and should be in operation by June 30,
1999, (iv) to provide working capital for new showrooms and Full Service Supply
Programs and (v) to fund acquisitions. Pending such uses, the net proceeds will
be loaned to Kennametal in exchange for a note bearing interest at a fluctuating
rate equal to Kennametal's short term borrowing costs which provides for the
repayment of amounts due thereunder upon demand by the Company. Kennametal's
short term borrowing rate during April 1997 was approximately 5.8%. Kennametal
will maintain unused lines of credit to enable it to repay any portion or all of
such loans upon demand by the Company.
The Company anticipates that its accounts receivable will continue to
increase due to increased sales levels and that inventory levels will also
increase due to the addition of new products, showrooms and Full Service Supply
Programs. Full Service Supply Program sales will experience a gradual reduction
in fiscal 1998 due to the termination of the GE contract. The Company, however,
believes that by redeploying its resources to existing Full Service Supply
Program customers and by offering Full Service Supply Programs to new customers,
it will be able to offset in part by fiscal 1997 and completely by fiscal 1998
the reduction in net sales. The Company believes that cash flows from operations
will be sufficient to fund future growth coupled with the net proceeds to be
received from the Offering.
The Company also believes it will have adequate funds to meet planned
capital expenditure needs. However, if the Company were to make any material
acquisitions, the Company may be required to obtain debt or equity financing.
The Company is not currently engaged in any material acquisition negotiations.
However, no assurance can be given that the Company will not negotiate or
consummate acquisitions in the near future.
On April 25, 1997, the Company, through J&L, obtained a $25.0 million line
of credit with a bank and shortly thereafter borrowed $20.0 million under the
line of credit to fund a dividend to Kennametal. Upon completion of the
Offering, a portion of the net proceeds will be used to repay the borrowings
under the line of credit. Interest payable under the line of credit is based on
the LIBOR rate plus 25 basis points and is required to be repaid in full within
six months. Kennametal has guaranteed repayment of the line of credit in the
event of default by the Company. In addition, J&L has a separate credit facility
aggregating $2.0 million used to support letters of credit with foreign vendors.
No amounts were outstanding under the credit facility as of March 31, 1997.
In April 1997, the Company acquired all of the outstanding stock of
Strelinger. Strelinger, with annualized sales of approximately $30.0 million in
1996, is based in Troy, Michigan and is engaged in the distribution of
metalcutting tools and industrial supplies. The Company paid approximately $4.0
million in cash and assumed certain liabilities totaling approximately $7.0
million. In May 1997, the Company acquired all of the outstanding stock of M&A.
M&A, with sales of approximately $6.0 million in 1996, is based in Roseville,
Michigan, and is engaged in the distribution of metalcutting tools and
industrial supplies. The Company paid approximately $1.2 million in cash and
assumed certain liabilities totaling $1.5 million. The Company borrowed the
necessary funds from Kennametal to pay for these acquisitions and will use a
portion
25
<PAGE> 27
of the net proceeds of the Offering to repay Kennametal. The Company does not
expect that these acquisitions will have a material adverse effect on the
results of operations in either the fourth quarter of fiscal 1997 or fiscal
1998.
TERMINATION OF LARGE CONTRACT
For the nine month period ended March 31, 1997, the Company had $225.2
million in net sales of which $39.6 million of net sales were related to a Full
Service Supply Program contract with GE for services provided at certain
metalworking manufacturing facilities within GE's Aircraft Engine Group (the "GE
Contract"). The operating margin related to the GE Contract was lower than the
Company's other Full Service Supply Program contracts. Many of the products
provided by the Company to GE under the GE Contract fell outside of the
Company's core focus on metalworking consumables and related products.
In April 1997, the Company conducted extensive negotiations with GE
relating to the continuation of the GE Contract. After careful evaluation, the
Company concluded that it was not in its best interest to accede to certain
price concessions requested by GE. As a result, GE served notice to the Company
that the GE Contract would not be renewed for a significant portion of the
manufacturing facilities served by the Company.
The Company is currently developing a plan of disengagement from those
manufacturing sites that are not being continued. Although such plan has not yet
been fully developed and reviewed with GE, the Company expects that it will
result in a gradual reduction in future sales to GE until the implementation of
this disengagement plan is completed, which is expected to occur by June 1998.
In fiscal 1998 in conjunction with such disengagement, the Company expects sales
to GE to amount to approximately 30% of the total amounts to be received by the
Company in fiscal 1997 under the GE Contract. After fiscal 1998, estimated sales
to GE for those manufacturing sites that will continue to be served by the Full
Service Supply Programs are expected to amount to approximately 10% of the total
amounts to be received by the Company in fiscal 1997 under the GE Contract.
The Company is currently redeploying its resources related to the GE
Contract to take advantage of requests by certain current Full Service Supply
Program customers to ramp-up their existing programs at an increased rate as
well as to offer Full Service Supply Programs to new customers. However, there
can be no assurance that the Company will be able to replace the revenues
received from the GE Contract within the foreseeable future period or at all. No
other customer accounted for more than 6% of the Company's net sales or for the
nine months ended March 31, 1997. The Company does not expect that the loss of
the GE Contract will have a material effect on the results of operations in
either the fourth quarter of fiscal 1997 or in fiscal 1998.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The Company adopted SFAS No. 121 on July 1, 1996 and the adoption of SFAS
No. 121 did not have an impact on the Consolidated Financial Statements as the
statement is consistent with existing Company policy.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the provisions of SFAS No. 123, companies may elect to
account for stock-based compensation plans using a fair-value-based method or
may continue measuring compensation expense for those plans using the intrinsic-
value-based method. Companies electing to continue using the
intrinsic-value-based method must provide pro forma disclosure of net income and
earnings per share as if the fair-value-based method had been applied.
Management intends to account for stock-based compensation using the
intrinsic-value-based method and, as such, SFAS No. 123 will not have an impact
on the Company's results of operations or financial position. The required
disclosure will be provided in the Company's fiscal 1997 consolidated financial
statements.
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The FASB also recently issued SFAS No. 128, "Earnings Per Share" and SFAS
No. 129, "Disclosure of Information about Capital Structures." SFAS No. 128 was
issued in February 1997 and is effective for periods ending after December 15,
1997. This statement, upon adoption, will require all prior period earnings per
share ("EPS") data to be restated to conform to the provisions of the statement.
This statement's objective is to simplify the computations of EPS and to make
the U.S. standard for EPS computations more compatible with that of the
International Accounting Standards Committee. The Company will adopt SFAS No.
128 in fiscal 1998 and does not anticipate that the statement will have a
significant impact on its reported EPS.
SFAS No. 129 was issued in February 1997 and is effective for periods
ending after December 15, 1997. This statement, upon adoption, will require all
companies to provide specific disclosure regarding their capital structure. SFAS
No. 129 will specify the disclosure for all companies, including descriptions of
their capital structure and the contractual rights of the holders of such
securities. The Company will adopt SFAS No. 129 in fiscal 1998 and does not
anticipate that the statement will have a significant impact on its disclosure.
EFFECTS OF INFLATION
Despite modest inflation in recent years, rising costs continue to affect
the Company's business. However, the Company does not believe that inflation has
had a material effect on its results of operations in recent years. The Company
strives to minimize the effects of inflation through cost containment and price
increases under highly competitive conditions.
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BUSINESS
THE COMPANY
The Company is one of the largest suppliers of a broad range of
metalworking consumables and related products to customers in the United States,
offering a full line of cutting tools, carbide and other tool inserts,
abrasives, drills, machine tool accessories, hand tools and other industrial
supplies. To meet the varying supply needs of small, medium and large-sized
customers, the Company offers: (i) a direct-marketing program, whereby the
Company supplies predominantly small and medium-sized customers through catalog
and showroom sales and (ii) integrated industrial supply programs, by which
large industrial manufacturers engage the Company to carry out all aspects of
complex metalworking supply processes, including needs assessment, cost
analysis, procurement planning, supplier selection, "just-in-time" restocking of
supplies and ongoing technical support. The Company also conducts its
direct-marketing program for small and medium-sized customers in the United
Kingdom.
The Company estimates the size of the United States market for metalworking
consumables and other related products in which the Company participates at
approximately $50.0 billion. The Company believes it has and will continue to
enjoy strong growth from two important trends now impacting the industrial
supply industry. First, the industrial supply industry is experiencing
consolidation of currently fragmented distribution channels, as customers seek
and technology makes possible, the convenience, cost savings and economies of
scale associated with single sources of supplies. Second, to achieve even
greater cost savings and efficiencies, manufacturers are outsourcing complex
procurement and possession processes needed to supply metalworking products that
are critical to their manufacturing operations. As a market leader with a broad
range of products and services and proven capabilities, the Company is
well-positioned to continue to take advantage of these industry trends.
The direct-marketing program serves the needs of predominantly small and
medium-sized metalworking customers by offering 100,000 SKUs through the
Company's 1,465 page master catalog, the Advantage, additional mailings and
advertisements, telemarketing efforts, direct sales efforts and 24 showrooms.
The Company offers customers the advantages of (i) a single source of supply for
all metalworking consumables and related products, (ii) a tiered product
offering (such as "good," "better" and "best"), (iii) same-day pick-up for the
most popular products stocked at showrooms, (iv) same-day direct shipping and
(v) a state-of-the-art order entry system that tracks product availability and
pricing, provides technical product information and results in an order being
completed in an average time of three minutes. In addition, the Company has a
dedicated sales force based in each showroom that actively calls on targeted
customers.
Full Service Supply Programs allow customers to achieve substantial cost
savings in metalworking consumables and overall manufacturing processes by
outsourcing the entire process of acquiring and possessing metalworking and
related products at manufacturing facilities. Customers, such as General Motors
Corporation, Allied Signal and Emerson Electric, use Full Service Supply
Programs at designated manufacturing facilities to (i) consolidate all of their
metalworking consumables and related product purchases with one vendor, (ii)
eliminate a significant portion of the administrative overhead burden associated
with the internal purchasing function, (iii) ensure appropriate technical
expertise in the selection and use of supplies for complex metalworking
processes and (iv) minimize the level of investment in tooling inventory,
thereby reducing inventory carrying costs. The Company's technical experts
customize and manage a comprehensive computerized product identification,
tracking and purchasing system that analyzes and optimizes supply usage, helps
select appropriate products and allows for "just-in-time" replacement of
inventory. To increase efficiency and maximize cost savings for its customers,
the Company also provides ongoing application assistance in the usage of
metalworking tools. The Company believes that its Full Service Supply Programs
typically reduce customers' costs of acquiring, possessing and using
metalworking products by approximately 5% to 20% per year.
The Company has grown rapidly due to geographic expansion, expanded product
offerings, increased direct mailings and an increased demand for both
single-source supply and integrated industrial supply programs such as its Full
Service Supply Programs. From fiscal 1993 through fiscal 1996, the Company's net
sales increased from $109.4 million to $244.0 million, representing a CAGR of
30.7%. Operating income during this period increased from $5.0 million to $24.9
million, representing a CAGR of 70.4%. During this
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same period, the Company's number of active direct-marketing customers increased
from 47,000 to 71,000 and the number of such customers who purchase annually
over $10,000 of products increased from 800 to 2,300. Specific drivers of growth
include:
- STRONG GROWTH IN EXISTING MARKETS. The Company has grown its net sales
84% from fiscal 1993 through fiscal 1996 in areas where it has had an
existing showroom as of the beginning of fiscal 1993 or which have been
served only through catalog sales. The Company did not add a showroom in
these areas during that period. The primary source of this growth has
been from areas where a showroom existed. In these areas, the Company
gained marketshare through targeted marketing to existing and prospective
customers.
- PENETRATION OF NEW MARKETS. From fiscal 1993 through fiscal 1996, sales
have grown 233% in areas in which new showrooms have been added, with 12
new showrooms in the United States and one in the United Kingdom added
during the period. Along with these showrooms, the Company uses a focused
sales call process to build sales.
- EXPANDED PRODUCT OFFERINGS. From the beginning of fiscal 1993 through
fiscal 1996, the Company added over 600 pages, including 40,000 new SKUs
and 165 product brand names and private labels, to its annual master
catalog.
- EXPANSION OF FULL SERVICE SUPPLY PROGRAMS. From the beginning of fiscal
1993 through fiscal 1996, the number of customers in Full Service Supply
Programs increased from nine to 42, with site locations increasing from
32 to 86.
The Company believes that a significant factor contributing to its growth
has been its ability to identify itself as an affiliate of Kennametal, the
largest North American provider of metalcutting tools and tooling systems. The
Company also relies upon and markets its access to Kennametal's research and
technical expertise in tooling products and supplies. See "Risk Factors--Control
by Kennametal." The Company was incorporated in Pennsylvania on April 28, 1997
to be a holding company for the Industrial Supply Business.
The address of the Company's principal executive offices is State Route 981
South, P.O. Box 231, Latrobe, Pennsylvania 15650 and its telephone number is
(412) 539-5000.
INDUSTRY OVERVIEW
The Company operates in a large, fragmented industry characterized by
multiple channels of distribution. The Company estimates the size of the United
States market for metalworking consumables and related products in which the
Company participates at approximately $50.0 billion. The Company believes that
there are numerous small retailers, dealers and distributors, substantially all
of which have annual sales of less than $10 million, which supply a majority of
this market. The distribution channels in the metalworking consumables and
related products market include retail outlets, small dealers, regional and
national distributors, utilizing direct sales forces, and manufacturers'
representatives.
The Company believes that increasing numbers of industrial manufacturers
are searching for ways to reduce costs by eliminating the inefficiencies of
traditional industrial supply distribution. This growing recognition by
customers of the high costs and operational inefficiencies associated with
purchasing industrial supplies from traditional distributors has increased
demand for alternative methods of distribution, leading to the development of
programs which are generally referred to as "integrated supply." These programs
vary widely, but include such concepts as corporate purchasing cards, industrial
supply consortiums and direct-mail supply.
The traditional model for the distribution of industrial supplies is
burdened by both the duplication and the inefficient performance of multiple
functions. In the traditional model, the industrial distributor must (i) source
and absorb the freight costs for the item, (ii) receive, warehouse and account
for the item, (iii) invest in inventory and incur the associated carrying costs
and (iv) market and sell the item to the end user. Once the need for the item
arises, the manufacturing facility requiring the item must repeat many of these
steps, including (i) sourcing and absorbing the freight costs for the item, (ii)
receiving, warehousing and
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accounting for the item, (iii) investing in inventory and incurring the
associated carrying costs and (iv) issuing the item to the user in the
manufacturing facility. Through the Company's integrated Full Service Supply
Programs, which focus on the acquisition, possession and use of metalworking
consumables and related products, each activity is performed only once. The
procurement of industrial supplies is generally outside the core activity of
most manufacturers. For example, industrial supplies are generally purchased by
personnel whose expertise in purchasing these items is limited. In addition,
supplies are typically stored in a number of locations within an industrial
facility, resulting in excess inventories and duplicate purchase orders.
Finally, the Company believes that industrial supplies are frequently purchased
by multiple personnel in uneconomic quantities, and a substantial portion of
most facilities' industrial supplies are one-time purchases which entail higher
per item prices and time-consuming administrative efforts. As a result, the
Company believes that there is often potential to manage the industrial supply
procurement process more efficiently and with greater cost savings. The Company
believes its Full Service Supply Programs eliminate the duplication and waste
inherent in the traditional industrial distribution model. The Company
streamlines the procurement process and generates system-wide savings generally
ranging from 5% to 20% of customers' annual acquisition, possession and usage
costs for such products.
In addition to the cost savings inherent in eliminating several steps in
the distribution process, the Company believes its expertise in the use of
metalworking products that it procures and delivers in its Full Service Supply
Programs also leads to ongoing operational improvements at the customers'
manufacturing facilities.
Despite the apparent inefficiencies of the traditional industrial supply
purchasing process, long-standing relationships with local retailers and
distributors have generally perpetuated the status quo. Due to limited capital
availability, high operating cost structures and smaller sales volumes,
suppliers to the industrial market are experiencing increasing pressure to
consolidate and curtail services and certain product lines in order to remain
competitive. Even large suppliers with extensive field sales forces are finding
it increasingly difficult to visit all buyers cost-effectively and to provide
the support necessary to satisfy their demands for cost containment and improved
efficiency. The Company believes that the relative inability of traditional
distribution channels to respond to these changing industry dynamics has created
a continuing opportunity for the growth of direct marketing and integrated
supply organizations such as the Company. As a result of these dynamics,
non-traditional distributors, such as the Company, have captured an increasing
share of sales by providing lower total purchasing costs, better product
selection and a higher level of service. As a leading non-traditional supplier
with proven capabilities both in direct marketing and integrated supply, the
Company believes it is well-positioned to continue to take advantage of present
market dynamics and enjoy continued growth in market share.
BUSINESS STRATEGY
The Company's business strategy is to become the preferred supplier of
metalworking consumables and related products to the metalworking industry by
being a "one-stop shop" for metalworking products for small and medium-sized
customers and by offering managed solutions for large customers. The Company
believes its market-leadership position results from the successful
implementation of its business strategy, the major elements of which include:
- BREADTH OF METALWORKING PRODUCTS AND METALWORKING FOCUS. As its
customers continue to consolidate their suppliers, the Company
differentiates itself through its breadth of metalworking products and
metalworking focus. The Company believes its ability to offer a broad
spectrum of metalworking products and a tiered product selection
alternative through which similar product offerings with varying degrees
of name recognition, quality and price are categorized, such as "good,"
"better" and "best," has been an important component in expanding direct
marketing sales to small and medium-sized customers. The Company's
metalworking focus also enables the Company to understand complex
industrial metalworking processes so as to provide valuable technical
advice that reduces costs to its Full Service Supply Program customers.
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- EXCEPTIONAL CUSTOMER SERVICE. The Company emphasizes exceptional
customer service supported by sophisticated information systems and
ongoing employee training. The Company's telemarketing representatives,
utilizing sophisticated customer support software, inform catalog
customers on a real-time basis of the Company's product availability and
pricing, verify credit information, update customer information and
provide technical product information in calls lasting on average only
three minutes. For customers participating in its Full Service Supply
Programs, the Company provides continuous improvement specialists to
ensure quality service and low costs by assisting such customers in the
acquisition, possession and use of metalworking consumables and related
products.
- RAPID FULFILLMENT AND JUST-IN-TIME PRODUCT DELIVERY. The Company
believes that its ability to fulfill rapidly the orders of
convenience-driven customers and manage complex procurement processes for
large clients has been critical to its growth. The Company has developed
highly efficient inventory management and order fulfillment systems that
allow more than 99% of domestic orders received by 5:00 p.m. to be
shipped on the same day and delivered by low-cost ground carriers. In
addition, in its Full Service Supply Programs, the Company uses
sophisticated systems that permit "just-in-time" purchasing and delivery
of products resulting in low costs to its customers.
- COMMITMENT TO TECHNOLOGICAL INNOVATION. The Company uses technology to
benefit customers and to improve the Company's productivity and
efficiency. The Company's sophisticated customer support software tracks
all 100,000 SKUs, enabling its telemarketing representatives to inform
catalog customers on a real-time basis of the Company's product
availability and pricing, verify credit information, update customer
information and provide technical product information. The software for
Full Service Supply Programs allows the Company to manage and automate a
large customer's entire processes related to the acquisition, possession
and use of metalworking consumables and related products.
GROWTH STRATEGY
The Company's objective is to expand its leadership position as a preferred
supplier to small, medium and large customers for metalworking consumables and
related products. The major elements of the Company's growth strategy include:
- INCREASED PENETRATION OF EXISTING MARKETS. The Company intends to
increase sales to small and medium-sized consumers by (i) expanding
targeted direct-mail and related campaigns, (ii) increasing the number of
products, product lines, product brand names and private labels offered
in its master catalog and (iii) focusing the Company's sales force on
marketing to these consumers. The Company plans to build on its
comprehensive marketing approach, which includes special showroom events
and targeted direct-mail and ongoing product promotions. In markets in
which the Company has had showrooms for at least three years, such as the
Detroit metropolitan area, the Company intends to increase its market
share by adding showrooms and expanding the services it offers to its
customers. The Company also plans to build on its reputation with Full
Service Supply Program customers to expand into other facilities of such
customers, while seeking new customers.
- FURTHER EXPANSION INTO NORTH AMERICAN MARKETS. To continue expanding its
North American presence, the Company plans to increase distribution
capacity and operational efficiency, add new showrooms and increase the
customer base for its Full Service Supply Programs. The Company plans to
construct a new midwest distribution center with a portion of the
proceeds from the Offering. New showrooms have historically resulted in
substantial growth in sales in the surrounding territory. For example,
when the Company opened its showroom in Atlanta in September 1995, sales
in that market increased by over 200% in the following nine months. The
Company has showrooms in 19 of the top 50 industrial markets in the
United States and intends to have showrooms in 40 of such 50 markets over
the next several years. In connection with this expansion, the Company
will continue to consider strategic acquisitions of metalworking
distributors, such as the Strelinger Acquisition in April 1997 and the
M&A Acquisition in May 1997. The Company intends to continue to leverage
its relationship with Kennametal to market its Full Service Supply
Programs to large industrial metalworking customers of
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Kennametal. The Company also intends to customize versions of its Full
Service Supply Programs to meet the needs of medium-sized industrial
facilities. The Company estimates that the market for Full Service Supply
Programs consists of 12,000 to 15,000 industrial manufacturing facilities
in the United States.
- EXPANSION INTO INTERNATIONAL MARKETS. The Company believes that the
consolidation and outsourcing trends which provide growth opportunities
in the United States also offer comparable opportunities in international
markets. The Company entered the United Kingdom market in fiscal 1995
with a 256-page catalog which included over 20,000 products. In April
1997, the Company released an 800-page catalog which includes over 60,000
products. The Company now has over 13,000 active customers in such
market. Over the next five years, the Company anticipates launching
additional direct-marketing efforts and opening showrooms in the United
Kingdom, Germany and certain other European countries and is considering
direct marketing in certain other countries. The Company is also planning
to introduce its Full Service Supply Programs into international markets,
such as the United Kingdom and Germany, by offering this service to
foreign manufacturing facilities of the Company's domestic Full Service
Supply Program customers and to Kennametal's foreign customers.
PRODUCTS AND MARKETING
The Company sells a full line of cutting tools, carbide and other tool
inserts, abrasives, drills, machine tool accessories, hand tools and other
industrial supplies through direct marketing and Full Service Supply Programs.
The Company had in excess of 81,000 active customers as of March 31, 1997,
ranging from small one-person machine shops to Fortune 500 companies. To serve
this market, the Company focuses its direct-marketing efforts on small and
medium-sized metalworking customers, while its Full Service Supply Programs are
targeted to large industrial manufacturers.
The Company intends to become the preferred supplier of metalworking
consumables and related products to the metalworking industry. The Company's
catalogs, flyers and other direct-marketing efforts are focused on small to
medium-sized metalworking customers, although catalog purchasers may include
large metalworking facilities that have an immediate need for a particular
metalworking product. These customers include machine shops, dealers,
institutions, such as vocational and technical schools, and home hobbyists.
The Company's direct-marketing efforts are multi-faceted, creating sales
growth in four ways, including through: (i) a dedicated sales force based in
each showroom that actively calls on targeted customers, (ii) showrooms which
have various promotional events, display high volume products, and provide the
ease of local pickup, (iii) a master catalog which facilitates sales through the
Company's highly efficient telemarketing sales process and (iv) direct mailings
of brochures and flyers, which provide a constant flow of promotional materials
to existing and prospective customers.
Each market that is served by a showroom has a sales representative
dedicated to calling on a specific, focused list of customers. These sales
representatives help build customer relationships to facilitate showroom and
catalog sales.
The showrooms serve several functions by providing promotional
opportunities, convenience of local pickup and personal service to its
customers. Each showroom has periodic promotional events, such as grand opening
events and customer appreciation days (barbecue luncheons and other such events)
that can attract as many as 900 customers. If a customer has an immediate need
for the Company's products, the showroom enables the customer to pick up any of
the Company's 12,000 to 15,000 most popular products. The showrooms provide the
Company another point of access to customers to build relationships and provide
personal service.
The Company utilizes an annual master catalog which currently offers
100,000 SKUs, a 100% increase in SKUs since fiscal 1993. The number of active
customers placing catalog orders during such period increased from 41,000 to
81,000. The average size of a catalog order received by the Company in fiscal
1996 was $130, and the number of customers who purchase annually over $10,000 of
products increased from 800 to 2,300 from fiscal 1993 through fiscal 1996. The
Company attributes a portion of this sales growth to the increased
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number of SKUs offered in its catalogs. In this regard, the Company intends to
continue to add new metalworking product categories and increase the number of
metalworking products offered within existing categories in its efforts to gain
new customers and increase sales from existing customers.
The Company's master catalog and other mailings offer specific products
from over 600 vendors at different prices and quality levels which permits the
Company to offer a tiered product selection alternative. This alternative
provides the customer a choice among similar product offerings with varying
degrees of name recognition, quality and price, such as "good," "better" and
"best," thus permitting the customer to choose the appropriate product for a
specific task at the lowest cost. For example, if a customer requires a drill
bit to drill 10 holes, it would be inefficient to purchase the top-of-the-line
name brand drill bit which is capable of drilling 1,000 holes. The number of
publications mailed by the Company to customers has significantly increased from
approximately 1.4 million mailed in fiscal 1993 and is expected to reach
approximately 3.2 million in fiscal 1997. The Company's in-house staff designs
and produces the content of all of its catalogs, brochures and flyers. Each
publication is printed with photographs, contains detailed product descriptions
and includes a toll-free telephone number to be used by customers to place a
product order. In-house production of these marketing materials helps reduce
overall expense and shorten production time, allowing the Company the
flexibility to alter its product offerings and pricing and refine its catalog,
brochure and other formats more quickly.
The Company believes that its product alternative offerings and
knowledgeable customer service and support personnel result in significant
amounts of repeat business. On average, the Company annually has retained
approximately 97% of its customers who purchase over $2,000 of products.
The Company procures and delivers a broad range of metalworking consumables
and related products to large metalworking facilities through its Full Service
Supply Programs. These customers include automotive manufacturers such as
General Motors Corporation's Saturn division, suppliers to the automotive
industry such as Dana Corporation, aerospace industry manufacturers such as
Pratt & Whitney and Allied Signal, oil equipment suppliers such as Baker Hughes
and other major industrial suppliers and manufacturers who cut, form, shape,
grind, drill or machine metal or other hard materials. Large metalworking
facilities traditionally purchase substantial quantities of industrial supply
products from numerous vendors. In an effort to lower costs, managers of many of
these large facilities have been attempting to curtail the number of vendors
used and the administrative overhead costs devoted to the purchasing process as
well as to pursue inventory reduction programs. The Company believes that large
metalworking facilities often incur excess costs for the acquisition, possession
and use of industrial supply products because these items are frequently stored
in and ordered by multiple locations, resulting in excess inventories,
obsolescence, duplicative purchase orders and time-consuming administrative
efforts by multiple plant personnel who lack product knowledge.
To address the needs of such large metalworking customers, the Company
offers various tiers of integrated supply services ranging from programs that
supply only metalworking cutting tools and inserts to those which supply all
metalworking and other related products. In a Full Service Supply Program, the
Company replaces a customer's product purchasing system at a manufacturing
facility with the Company's comprehensive proprietary computerized
identification, product tracking and purchasing systems. The Company creates for
each type of metalworking product used by the customer a proprietary
identification of the type and manufacturer of such product. At the customer's
facility, the Company organizes the customer's storage of metalworking products
into one or more tool cribs and places into compartments in each tool crib
sealed boxes containing a specified quantity or lot of each type of product. A
proprietary inventory control card (a "Kanban" card) is attached to each box
which contains in barcoding the product identification information, the quantity
of products within the box, the relevant tool crib and other information. When a
customer's employee needs a product, the employee removes the relevant box from
the tool crib, detaches the Kanban card and places it in a separate container
and uses the needed product. The detached Kanban cards are collected daily from
all of the tool cribs and transmitted either electronically or by facsimile to
the Company which enters the information contained on the Kanban card into the
Company's computerized product tracking and purchasing systems. The Company's
systems use this information to manage on a "just-in-time" basis the timing of
the sale and delivery to the customer's tool cribs of all of the metalworking
consumables and other products which the customer needs in its manufacturing
processes at that facility.
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The Company believes that its Full Service Supply Programs typically reduce
customers' costs of acquiring, possessing and using metalworking products by
approximately 5% to 20% per year. Such programs reduce the quantity of such
consumables which the customer must maintain in its tool cribs through the
Company's "just-in-time" system, assure delivery to the correct location within
the customer's facility of the proper metalworking products, perform the quality
assurance function for the customer and furnish technical assistance to the
customer. The Company also provides various levels of electronic data
interchange ("EDI") with Full Service Supply Program customers to enhance their
cost reduction efforts. The Company can use EDI with a customer for invoicing,
funds transfer, ordering, shipping and acknowledgment. The Company also provides
independent testing and evaluation of competing manufacturer's products.
The Company intends to continue to leverage its relationship with
Kennametal to market its Full Service Supply Programs to large industrial
metalworking customers of Kennametal, which include a significant portion of all
metalworking manufacturers in North America, and to leverage its relationship
with existing Full Service Supply Program customers in order to introduce its
integrated supply programs in multiple facilities of such customers. The Company
also intends to customize versions of its Full Service Supply Programs to meet
the needs of medium-sized industrial facilities.
A significant number of the Company's products are carried in stock at the
Company's 13 distribution centers and warehouses, seven of which are shared with
Kennametal. See "Relationship with Kennametal-- Shared Facilities Agreements."
Most orders are filled from these distribution centers and warehouses. The
distribution centers range in size from 1,500 to 100,000 square feet and
typically include a showroom. The Company currently has six distribution centers
in the United States located in Charlotte, North Carolina; Chicago, Illinois;
Dallas, Texas; Detroit, Michigan; Hartford, Connecticut; and Los Angeles,
California.
CUSTOMER SERVICE
The Company believes that customer service and support are critical
components of its success. For small and medium-sized customers, one of the
Company's goals is to make purchasing its products as convenient as possible.
Since a majority of these orders are placed by telephone, the efficient handling
of calls is an extremely important aspect of the Company's business. Order entry
and fulfillment occurs at each of the Company's distribution centers and
warehouses. Calls are received by one of the Company's 85 inbound telemarketing
representatives who utilize on-line terminals to enter customer orders into
computerized order processing systems. The Company's telephone ordering system
is flexible and, in the event of a local or regional breakdown, can be rerouted
to alternative locations. These inside sales representatives are highly trained
individuals who respond to customer inquiries and process and update customer
account profiles in the Company's information system databases in a call which
usually lasts an average of three minutes. While taking an order, these sales
representatives are able to inform catalog customers on a real-time basis of the
Company's product availability and pricing, verify credit information, update
customer information and provide technical product information. The Company also
maintains a separate technical support group available to all customers by
telephone dedicated to answering specific customer inquiries and assisting
customers with the operation of products and finding low-cost solutions to
manufacturing problems. The Company provides several weeks of training to new
sales representatives concerning its extensive product offering, the use of its
sophisticated customer support software and the Company's approach to customer
service. The Company also sponsors the attendance by a number of its employees
at vocational metalworking training programs to familiarize them better with the
selection, application and use of the Company's products.
When a direct-marketed order is entered into the system, a credit check is
performed and, if the credit is approved, the order is electronically
transmitted to the distribution center, warehouse or showroom closest to the
customer and a packing slip is printed for order fulfillment. Most of the orders
placed with the Company are shipped by United Parcel Service ("UPS") and, to a
limited extent, by various other freight lines and local carriers. Air freight
is also used when appropriate. The Company is not dependent on any one carrier
and believes that alternative shipping arrangements can be made with minimal
disruption to operations in the event of the loss of UPS as the Company's
primary carrier. The Company believes that its relationships with all of its
carriers are excellent. The Company guarantees same-day shipping if the order is
received prior to
34
<PAGE> 36
5:00 p.m. local time, with most customers receiving orders (other than custom
items and large industrial items shipped directly by the manufacturer) within
one or two business days of the order date. Customers are invoiced for
merchandise, shipping and handling charges promptly after shipment. Back order
levels are immaterial.
The Company currently operates 23 domestic showrooms at which customers may
purchase products or pick-up products which have been ordered. Showrooms serve
as beacons in geographic areas in which the Company attempts to establish
relationships with and provide personal service to customers in those areas.
Each showroom has approximately 6,000 to 10,000 square feet of space and
consists of a small area in which the Company stocks the most frequently ordered
products and kiosks at which products are ordered and customer information is
obtained or updated. The Company selects showroom location sites based upon its
assessment of potential customers in a geographic area and their proximity to a
distribution center.
For customers participating in its Full Service Supply Programs, the
Company provides continuous improvement specialists to assist such customers,
assume responsibility for quality certification programs for vendors' tooling
products, provide independent test results of competing tooling vendors'
products, negotiate discounts with tooling vendors and implement EDI ordering,
billing and payment. In addition, the Company's continuous improvement
specialists assist Full Service Supply Program customers in the acquisition,
possession and use of industrial supplies.
INFORMATION SYSTEMS
The sophisticated information systems used by the Company allow centralized
management of key functions, including communication links between distribution
centers, inventory and accounts receivable management, purchasing, pricing,
sales and distribution, and the preparation of daily operating control reports
that provide concise and timely information regarding key aspects of its
business. These information systems enable the Company to ship to customers on a
same-day basis, respond quickly to order changes and provide a high level of
customer service. These systems enable the Company to achieve cost savings,
deliver exceptional customer service, manage its operations centrally and manage
its Full Service Supply Programs. Certain of the Company's information systems
operate over a wide area network and represent real-time information systems
that allow each distribution center to share information and monitor daily
progress relating to sales activity, credit approval, inventory levels, stock
balancing, vendor returns, order fulfillment and other performance measures. The
Company also maintains a sophisticated buying and inventory management system
that monitors substantially all of its SKUs and automatically purchases
inventory from vendors for replenishment based on projected customer ordering
models. The Company has invested significant resources in developing an
extensive customer and prospect database which includes detailed information,
including customer size, industry of operation, various demographic and
geographic characteristics and purchase histories of Company products. The
Company also provides EDI invoicing, funds transfer, ordering, shipping and
acknowledgment to large customers. As the Company's growth continues, the
Company expects to continue to improve and upgrade its information systems and
intends to implement Kennametal's SAP R/3, a new client-server information
system.
SUPPLIERS
The Company purchases substantially all of its products for its direct
marketing and Full Service Supply Programs from approximately 600 vendors. In
fiscal 1996 and for the nine months ended March 31, 1997, approximately 7% and
7%, respectively, of the Company's sales were of Kennametal products. Other than
Kennametal, the Company is not materially dependent on any one supplier or small
group of suppliers. If a Full Service Supply Program customer desires to
continue ordering a particular brand of metalworking tool or obtains or has a
contract providing for more favorable pricing than the Company generally
obtains, the Company will assume that contract or enter into a similar contract
for the limited purpose of supplying such product to that customer. Other than
Kennametal, no single supplier accounted for more than 5% of the Company's total
purchases in fiscal 1996. See "Relationship with Kennametal."
35
<PAGE> 37
ACQUISITIONS
In April 1997, the Company acquired all of the outstanding stock of
Strelinger. Strelinger, with annualized sales of approximately $30.0 million in
1996, is based in Troy, Michigan and is engaged in the distribution of
metalcutting tools and industrial supplies. The Company paid approximately $4.0
million in cash and assumed certain liabilities totaling approximately $7.0
million. In May 1997, the Company acquired all of the outstanding stock of M&A.
M&A, with sales of approximately $6.0 million in 1996, is based in Roseville,
Michigan, and is engaged in the distribution of metalcutting tools and
industrial supplies. The Company paid approximately $1.2 million in cash and
assumed certain liabilities totaling $1.5 million. The Company believes that the
customer base of Strelinger and M&A and their service capabilities will enhance
the Company's ability to serve small and medium-sized customers and strengthen
the Company's market presence in southeastern Michigan.
As the industrial supply industry continues to consolidate, the Company is
actively considering acquisitions as part of its growth strategy if
opportunities arise. From time to time, the Company has engaged in and will
continue to engage in preliminary discussions with respect to potential
acquisitions. The Company is not currently a party to any oral or written
acquisition agreement or engaged in any negotiations with respect to any
material acquisition candidate.
COMPETITION
The metalworking supply industry is a large, fragmented industry that is
highly competitive. The Company faces competition (i) in the small and
medium-sized metalworking markets from traditional channels of distribution such
as retail outlets, small dealers, regional or national distributors utilizing
direct sales forces, and manufacturers' representatives and (ii) in the large
industrial metalworking market from large distributors and other companies which
offer varying degrees and types of integrated industrial supply programs. The
Company believes that sales of metalworking products will become more
concentrated over the next few years, which may make the industry more
competitive. Certain of the Company's competitors offer a greater variety of
products (including nonmetalworking products) and have substantially greater
financial and other resources than the Company. The Company believes that
customer purchasing decisions are primarily based on one or more of the
following criteria: product price, product selection, product availability,
superior customer service, total cost of acquisition, possession and use of
products and convenience. The Company seeks to distinguish itself from other
direct marketers and distributors of industrial supplies through its national
presence and metalworking focus, its application of information technology and
its attractive, modern showrooms.
EMPLOYEES
As of March 31, 1997, the Company employed approximately 655 employees,
none of whom is represented by a labor union. The Company considers its
relationships with employees to be good and has experienced no work stoppages.
PROPERTIES
The Company's distribution centers, warehouses, showrooms and executive
offices, all of which are leased, are as follows:
<TABLE>
<CAPTION>
LOCATION DESCRIPTION LEASE EXPIRATION APPROXIMATE SQUARE FEET
- ---------------------- ---------------------- ---------------- -----------------------
<S> <C> <C> <C>
Albuquerque, NM Warehouse 06/31/98 8,000
Alsip, IL Showroom 03/31/98 6,400
Atlanta, GA Showroom 07/31/00 7,900
Charlotte, NC* Distribution Center 04/29/07 10,000
Chicago, IL Showroom 08/31/01 6,200
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
LOCATION DESCRIPTION LEASE EXPIRATION APPROXIMATE SQUARE FEET
- ---------------------- ---------------------- ---------------- -----------------------
<S> <C> <C> <C>
Cincinnati, OH Showroom 10/15/98 7,200
Cleveland, OH Showroom 06/30/00 9,000
Clinton Township, MI Showroom 06/30/99 6,000
Dallas, TX* Distribution Center 03/30/01 5,200
Dayton, OH Showroom 11/30/01 10,000
Grand Rapids, MI Showroom 09/30/00 9,800
Gurnee, IL Warehouse 06/30/00 6,600
Hartford, CT* Distribution Center 06/31/00 1,500
Houston, TX Showroom 12/31/02 7,200
Indianapolis, IN Showroom 04/01/05 6,600
Kingswinford, UK Distribution Center 04/29/07 6,000
Latrobe, PA* Executive Headquarters 04/29/07 1,500
Livonia, MI* Distribution Center 12/31/00 100,000
Livonia, MI Warehouse 08/31/99 46,000
Los Angeles, CA* Distribution Center 04/29/07 7,000
Milwaukee, WI Showroom 09/30/99 6,400
Minneapolis, MN Showroom 11/30/99 10,400
Mount Prospect, IL Distribution Center 12/31/98 40,000
Nashville, TN Warehouse 04/19/00 6,200
Orange County, CA Showroom 08/31/01 6,800
Phoenix, AZ Warehouse 03/31/01 7,700
Salem, NH Warehouse 09/30/98 10,000
San Jose, CA Showroom 08/31/00 9,000
Sterling Heights, MI Showroom 08/31/01 6,700
St. Louis, MO Showroom 04/30/01 7,000
Tempe, AZ Showroom 01/30/01 6,800
</TABLE>
- ---------
* Shared with Kennametal.
LEGAL MATTERS
There are no material legal proceedings pending against the Company.
37
<PAGE> 39
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to the directors
and executive officers of the Company. The directors and executive officers of
the Company were elected to the positions listed on April 28, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ---- ---------------------------------------------
<S> <C> <C>
Michael W. Ruprich............ 41 President and Director
Kenneth M. McHenry............ 41 Vice President--Sales and Marketing
Roland E. Lazzaro............. 38 Vice President--Operations
Michael J. Mussog............. 33 Vice President and Chief Financial Officer
Richard C. Alberding.......... 66 Director
Jeffery M. Boetticher......... 46 Director
Irwin L. Elson................ 58 Director
Aloysius T. McLaughlin, Jr.... 62 Director
Robert L. McGeehan............ 60 Director
William R. Newlin............. 56 Chairman of the Board
</TABLE>
Michael W. Ruprich has served as President of the Company since April 1997
and as Director of Global Marketing and Sales of Kennametal since July 1996. He
was elected a Kennametal Vice President in 1994. He served from 1994 to 1996 as
President of J&L, from 1992 to 1993 as General Manager of J&L and prior thereto,
as General Manager--East Coast Region of J&L. He will resign his positions with
Kennametal upon consummation of the Offering.
Kenneth M. McHenry has served as Vice President--Sales and Marketing since
April 1997. Prior thereto, he served from September 1993 to June 1997 as
National Sales Manager of J&L. From 1990 to September 1993, he was managing
partner of Flow Solutions Company (manufacturer's representative specializing in
industrial instrumentation and process control equipment).
Roland E. Lazzaro has served as Vice President--Operations since April
1997. Prior thereto, he served from May 1994 to June 1997 as Director, Branch
Development of J&L, from June 1992 to May 1994 as General Manager--East Coast
Region of J&L and from November 1990 to June 1992 as Controller of J&L.
Michael J. Mussog has served as Vice President and Chief Financial Officer
since April 1997. Prior thereto, he served from September 1996 to June 1997 as
Manager, Strategic Sales and Marketing Planning of Kennametal, from April 1995
to August 1996 as Chief Financial Officer of J&L and from February 1993 to March
1995 as Manager, External Reporting of Kennametal. Mr. Mussog is a certified
public accountant and prior to joining Kennametal was an Audit Manager for Price
Waterhouse LLP.
Richard C. Alberding is retired, having served as Executive Vice President,
Marketing and International, of Hewlett-Packard Company (a designer and
manufacturer of electronic products for measurement and computation). He is also
a director of Kennametal, Walker Interactive Systems, Inc., Sybase, Inc.,
Digital Microwave Corp., Paging Network, Inc., Quickturn Design Systems Inc. and
Digital Link Corporation.
Jeffery M. Boetticher is the Chief Executive Officer of Black Box
Corporation (a leading worldwide direct marketer of computer communications and
technical service provider of networking solutions), having also served as
President of Black Box Corporation from June 1994 through May 1997. Since March
1991, he has been President and Chief Executive Officer of Black Box Corporation
of Pennsylvania, a wholly-owned subsidiary of Black Box Corporation. He is also
a director of Holden Corporation, CME Information Services, Inc. and the
Pittsburgh High Technology Council.
Irwin L. Elson, a co-founder of J&L, is retired. He served as President of
J&L from July 1996 until shortly prior to the Offering and had been a Vice
President of Kennametal from 1990, when it acquired J&L, to August 1994.
38
<PAGE> 40
Aloysius T. McLaughlin, Jr. is a consultant to Dick Corporation (general
contracting), having served as its Vice Chairman from 1993 to 1995 and as its
President and Chief Operating Officer from 1985 to 1993. Mr. McLaughlin is a
director of Kennametal.
Robert L. McGeehan has been President of Kennametal since July 1989 and its
Chief Executive Officer since October 1991. He served as Director of
Metalworking Systems Division of Kennametal from 1988 to 1989 and as General
Manager of Machining Systems Division from 1985 to 1988. He has been a director
of Kennametal since 1989.
William R. Newlin has been Managing Director of Buchanan Ingersoll
Professional Corporation (attorneys at law) for more than the past five years.
He also serves as a Managing General Partner of CEO Venture Funds (private
venture capital funds). He has been a director of Kennametal since 1982 and its
Chairman of the Board since October 1996. He is also a director of Black Box
Corporation, National City Bank of Pennsylvania, Parker/Hunter Incorporated, the
Pittsburgh High Technology Council and CME Information Services, Inc. The law
firm of which Mr. Newlin is a member performed services for the Company and
Kennametal during fiscal 1997.
At or following the Offering, the existing directors of the Company will
increase the size of the Board to seven persons and will appoint one additional
director not affiliated with the Company or Kennametal to fill this vacancy.
In accordance with the terms of the Articles of Incorporation, prior to the
Control Termination Date, directors will hold office for one-year terms and be
elected at each annual meeting of the shareholders of the Company. After the
Control Termination Date, the Board of Directors will be divided into three
classes, designated as Class I, Class II and Class III, respectively, with
staggered three-year terms of office. At each annual meeting thereafter,
directors who are elected to succeed the class of directors whose terms expire
at that meeting will be elected for three-year terms.
BOARD COMMITTEES AND DIRECTOR COMPENSATION
The Audit Committee of the Board is comprised of Messrs. Alberding and
Boetticher. The Audit Committee's primary function is to evaluate management's
performance of its financial reporting responsibilities. The Committee is also
charged with reviewing the internal financial and operational controls of the
Company and with monitoring the fees, results and effectiveness of annual audits
and the independence of the public accountants.
The Compensation Committee of the Board is comprised of Messrs. McGeehan
and McLaughlin. The Compensation Committee generally, excluding the President,
whose compensation shall be recommended by the Compensation Committee, but
determined by the Board, is responsible for establishing salaries, bonuses and
other compensation for the Company's executive officers and for administering
the Company's compensation plans, including two plans the Company intends to
adopt prior to the Offering--the JLK Direct Distribution Inc. 1997 Stock Option
and Incentive Plan (the "1997 Plan") and the JLK Direct Distribution Inc.
Management Bonus Plan (the "JLK Bonus Plan"), each of which is more fully
described below.
Members of the Board of Directors who are not employees of the Company will
receive an annual retainer of $20,000 for membership on the Board of Directors.
In addition, a fee of $1,000 will be paid for attendance at each committee
meeting.
EXECUTIVE COMPENSATION
The Company was formed in April 1997. Prior to the Offering, the Company
did not have a separate Compensation Committee or other board committee
performing similar functions. These functions were performed by the Board of
Directors, Committee on Executive Compensation and executive officers of
Kennametal.
39
<PAGE> 41
The following table sets forth the compensation paid by Kennametal to the
Company's chief executive officer, Mr. Ruprich, during the last three fiscal
years and during the last completed fiscal year to each of the other three
executive officers of the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS(2) OPTIONS (3)
- ------------------------------------- -------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael W. Ruprich,.................. 1996 $ 197,968 $103,696 11,000 $5,045
President(4)(5) 1995 178,384 123,270 11,334 4,500
1994 155,044 82,693 -- 4,660
Kenneth M. McHenry,.................. 1996 110,000 30,000 3,000 4,033
Vice President--Sales and Marketing
Roland E. Lazzaro,................... 1996 103,800 31,500 3,000 2,002
Vice President--Operations
Michael J. Mussog,................... 1996 89,000 25,000 2,000 3,237
Vice President and Chief Financial
Officer
</TABLE>
- ---------
(1) In accordance with the rules promulgated by the Securities and Exchange
Commission (the "Commission"), only the information with respect to the most
recently completed fiscal year is required in the Summary Compensation Table
except for information that was previously reported to the Commission.
(2) Includes, for each of the Named Executive Officers, bonuses paid in shares
of Capital Stock, par value $1.25 per share, of Kennametal ("Kennametal
Capital Stock"), or in stock credits representing Kennametal Capital Stock
("Kennametal Stock Credits") as elected by the individual under Kennametal's
Performance Bonus Stock Plan of 1995 described below.
(3) This figure includes amounts contributed by Kennametal under the Kennametal
Inc. Thrift Plan. Eligible employees may elect to contribute 2% to 12% of
their monthly compensation (salary and, if applicable, bonus) to this plan.
Kennametal contributes to each participant's account an amount equal to
one-half of that portion of the employee's contribution which does not
exceed 6% of the employee's compensation. Contributed sums are invested in
proportions as directed by the employee among five different types of equity
funds (including the Kennametal Capital Stock fund), a Fixed Income Fund and
three balanced funds (consisting of both equity and fixed income
securities), each managed by investment management companies, and can be
withdrawn by the employee only upon the occurrence of certain events.
Certain terms of the plan are designed to make available to participants the
provisions of section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"), which permit elective employee contributions on a
pre-tax basis.
(4) Mr. Ruprich was President of J&L, then a wholly owned subsidiary of
Kennametal and, after the Offering, a wholly-owned subsidiary of the
Company, until June 30, 1996. Effective July 1, 1996, Mr. Ruprich was named
Director of Global Marketing and Sales, Kennametal. Mr. Ruprich was named
President of the Company upon its formation.
(5) All other compensation for Mr. Ruprich in each year includes imputed income
based upon premiums paid by Kennametal to secure and maintain for certain
officers, including all executive officers of Kennametal who elect to
participate, a $500,000 term life insurance policy on the life of such
officer until he or she reaches age 65.
Immediately following the Offering, the annual base salaries of the Named
Executive Officers will be as follows: Michael W. Ruprich, $350,000; Kenneth M.
McHenry, $170,000; Roland E. Lazzaro, $150,000; and Michael J. Mussog, $160,000.
In connection with the Offering, it is anticipated that the Company will adopt
the JLK Bonus Plan and the 1997 Plan, each of which is more fully described
below. Annual bonus
40
<PAGE> 42
opportunities for each of the Named Executive Officers under the JLK Bonus Plan
will be set at the following percentage of annual base salary: Michael W.
Ruprich, 66%; Kenneth M. McHenry, 60%; Roland E. Lazzaro, 45%; and Michael J.
Mussog, 50%. In addition, effective upon consummation of the Offering, the
Company will grant, pursuant to the terms of the 1997 Plan, options to purchase
Class A Common Stock at the initial public offering price set forth on the cover
page of this Prospectus to the Named Executive Officers in the following share
amounts: Michael W. Ruprich, 100,000; Kenneth M. McHenry, 50,000; Roland E.
Lazzaro, 50,000; and Michael J. Mussog, 50,000. The Company will also grant to
each non-employee director of the Company options to purchase 15,000 shares of
Class A Common Stock at the initial public offering price set forth on the cover
page of this Prospectus pursuant to the 1997 Plan.
KENNAMETAL MANAGEMENT PERFORMANCE BONUS PLAN
Bonus amounts set forth in the Summary Compensation Table were paid
pursuant to Kennametal's Management Performance Bonus Plan for executives and
managers which is designed to tie bonus awards to Kennametal performance, unit
performance, and individual contribution, relative to Kennametal's business
plans, strategies and shareholder value creation. This bonus plan also is
intended to maintain management compensation at a competitive level, as
indicated by published compensation surveys. After fiscal 1997, bonuses to the
Company's employees, including the Named Executive Officers, will be paid
pursuant to Company plans, including the JLK Bonus Plan. See "--JLK Direct
Distribution Inc. Management Bonus Plan."
KENNAMETAL PERFORMANCE BONUS STOCK PLAN
Pursuant to the Kennametal Inc. Performance Bonus Stock Plan of 1995,
participants in selected cash bonus and deferred compensation plans are
permitted to elect to receive, in lieu of their bonus, Kennametal Capital Stock
or Kennametal Stock Credits.
KENNAMETAL SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Each person who has an employment agreement with Kennametal or the Company
is eligible to receive supplemental retirement benefits for life following
termination of active employment by retirement or disability pursuant to the
Kennametal Inc. Supplemental Executive Retirement Plan. These supplemental
retirement benefits vest in equal annual increments over a term of five years
commencing on the officer's 56th birthday or completely upon the occurrence of a
change in control of Kennametal, whether or not the transaction or election
causing the change in control is approved by at least two-thirds of the
directors. If the officer dies while actively employed or receiving such
payments, his spouse or other designated beneficiary will receive annually up to
50% of the vested amount for life. The severance payments and the accrued
supplemental retirement benefits would be funded by the transfer of cash into a
Rabbi Trust upon the occurrence of a threatened or actual change in control of
Kennametal. For Company employees who participated in such plan prior to the
Offering as employees of Kennametal, the Offering will not trigger eligibility
for benefits under the plan, or constitute a change in control under the plan.
KENNAMETAL STOCK OPTION PLANS
The Kennametal Inc. Stock Option and Incentive Plan of 1988 (the "1988
Plan") provides for the granting of nonstatutory and incentive stock options and
share awards covering 1,000,000 shares of Kennametal Capital Stock. The
Kennametal Inc. Stock Option and Incentive Plan of 1992 (the "1992 Plan")
provides for the granting of nonstatutory and incentive stock options and share
awards covering the lesser of 1,650,000 shares (gross) and 1,100,000 shares
(net) of Kennametal Capital Stock. The Kennametal Inc. Stock Option and
Incentive Plan of 1996 (the "1996 Plan") provides for the granting of
nonstatutory and incentive stock options and share awards covering 1,500,000
shares of Kennametal Capital Stock. Although options are still outstanding under
the Kennametal Inc. Stock Option Plan of 1982, as amended, no further grants of
options may be made under that plan. Following the Offering, Company employees
will remain eligible to receive grants and awards under these plans.
41
<PAGE> 43
Under each of the plans, the price at which shares covered by an option may
be purchased must not be less than the fair market value of such shares at the
time the option is granted or, in the case of the non-qualified stock options
granted under the 1992 Plan, at not less than 75% of the fair market value. The
purchase price must be paid in full at the time of exercise either in cash or,
in the discretion of the administrator of the plan, by delivering shares of
Kennametal Capital Stock or a combination of shares and cash having an aggregate
fair market value equal to the purchase price. Under the 1988 Plan and 1996
Plan, any shares of Kennametal Capital Stock delivered as payment, in whole or
in part, of the purchase price must have been held by the optionee for at least
six months.
The following table sets forth information concerning options with respect
to Kennametal Capital Stock granted to the Named Executive Officers during
fiscal 1996:
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1996
-------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE VALUE(2)
- ------------------------------------- ---------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Michael W. Ruprich................... 11,000 1.9 $ 37.0625 7/29/05 $ 179,869
Kenneth M. McHenry................... 3,000 * 37.0625 7/29/05 49,055
Roland E. Lazzaro.................... 3,000 * 37.0625 7/29/05 49,055
Michael J. Mussog.................... 2,000 * 37.0625 7/29/05 32,703
</TABLE>
- ---------
* Less than 1%.
(1) These options were granted with an exercise price equal to the fair market
value of Kennametal Capital Stock on the date of grant and require the
optionee to hold 10% of the shares received from any exercise for a one-year
period from the date of exercise.
(2) Based on the Black-Scholes Option Valuation model adjusted for dividends to
determine grant date present value of the options. Kennametal has advised
the Company that it does not advocate or necessarily agree that the
Black-Scholes model properly reflects the value of an option. The
assumptions used in calculating the option value include the following: a
risk-free interest rate of 6.28% (the rate applicable to a ten-year treasury
security at the time of the award); a dividend yield of 1.9% (the annualized
yield at the date of grant); volatility of 30.227% (calculated using daily
stock returns for the 12-month period preceding the option award); and a
stock price at date of grant of $37.0625 (the exercise price at which these
options were granted was equal to the fair market value on the date of
grant). No adjustments were made for forfeitures or vesting restrictions on
exercise. The value of these options under the Black-Scholes model of option
valuation applying the preceding assumptions is $16.35170 per share. The
ultimate values of the options will depend on the future market price of
Kennametal Capital Stock, which cannot be forecast with reasonable accuracy.
The actual value, if any, an optionee will realize upon exercise of an
option will depend on the excess of the market value of Kennametal Capital
Stock over the exercise price on the date the option is exercised.
42
<PAGE> 44
The following table sets forth information concerning options to purchase
Kennametal Capital Stock held by the Named Executive Officers:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
YEAR END(#) YEAR END($)
SHARES ACQUIRED VALUE (EXERCISABLE/ (EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)
- ---------------------------------------------- --------------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Michael W. Ruprich............................ -0- $-0- 34,834/0 $ 144,684/0
Kenneth M. McHenry............................ -0- -0- 3,000/0 0/0
Roland E. Lazzaro............................. -0- -0- 3,000/0 0/0
Michael J. Mussog............................. -0- -0- 2,000/0 0/0
</TABLE>
RETIREMENT BENEFITS
The Named Executive Officers and certain other Company employees are
entitled to receive benefits pursuant to the Kennametal Inc. Retirement Income
Plan. The following table indicates, for purposes of illustration, the
approximate annual retirement benefits that would be payable at the present time
on a straight life annuity basis pursuant to the Kennametal Inc. Retirement
Income Plan, including supplemental retirement benefits under various
assumptions as to salary and years of service to employees in higher salary
classifications. The amounts shown below have not been adjusted for Social
Security benefits which offset the Company's obligation under the plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ANNUAL BENEFIT UPON RETIREMENT WITH INDICATED YEARS OF
ANNUALIZED CREDITED SERVICE
COVERED -----------------------------------------------------------
COMPENSATION 15 20 25 30 35
- ------------ ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 75,000 $22,500 $ 30,000 $ 37,500 $ 41,250 $ 45,000
100,000 30,000 40,000 50,000 55,000 60,000
150,000 45,000 60,000 75,000 82,500 90,000
200,000 60,000 80,000 100,000 110,000 120,000
250,000 75,000 100,000 125,000 137,500 150,000
</TABLE>
Pursuant to the Kennametal Inc. Retirement Income Plan, annual benefits
payable upon retirement to eligible salaried employees are calculated based upon
a monthly benefit equal to 2% of Covered Compensation (as described below) for
each year of credited service up to a maximum of 25 years, plus 1% of Covered
Compensation for each year of credited service over 25 years, less 1.5% of the
primary monthly Social Security benefit payable for each year of credited
service up to a maximum of 33 1/3 years (50% of the monthly Social Security
benefit). Covered Compensation is based on average monthly earnings, consisting
solely of base salary and bonus (which amounts for the past three fiscal years
are included in the Salary and Bonus columns of the Summary Compensation Table),
for the nine years out of the last twelve years of service immediately preceding
retirement during which the highest compensation was received. The entire cost
of the plan is paid by Kennametal although, after the Offering, the Company will
be required to reimburse Kennametal for the incremental cost of providing the
benefit to employees of the Company. Under the Code, certain limits are imposed
on payments under the plan. Payments in excess of the maximum annual pension
benefits payable under this plan to the Named Executive Officers and certain
other executive officers of Kennametal and the Company would be paid pursuant to
the Supplemental Executive Retirement Plan as more fully described above.
Following the Offering, the Company will reimburse Kennametal for any
supplemental retirement benefit amounts paid by Kennametal to former Company
employees under these plans.
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<PAGE> 45
As of June 30, 1996, the credited years of service under the Kennametal
Inc. Retirement Income Plan for the Named Executive Officers were approximately:
Michael W. Ruprich, seven years; Kenneth M. McHenry, three years; Roland E.
Lazzaro, 11 years; and Michael J. Mussog, four years.
Annualized Covered Compensation as of June 30, 1996, for purposes of the
retirement benefits table set forth above for the Named Executive Officers is as
follows: Michael W. Ruprich, $135,752; Kenneth M. McHenry, $101,117; Roland E.
Lazzaro, $77,844; and Michael J. Mussog, $84,724.
JLK DIRECT DISTRIBUTION INC. MANAGEMENT BONUS PLAN
It is anticipated that, prior to the Offering, the Company's Board of
Directors will adopt the JLK Bonus Plan for executives and managers which is
designed to tie bonus awards to Company performance, unit performance and
individual contribution, relative to the Company's business plans, strategies
and stockholder value creation. This bonus plan also is intended to maintain
management compensation at a competitive level, as indicated by published
compensation surveys. Each of the Named Executive Officers is eligible to
receive bonuses under this plan. The annual bonus opportunities for each of the
Named Executive Officers is specified above under "--Executive Compensation."
JLK DIRECT DISTRIBUTION INC. 1997 STOCK OPTION AND INCENTIVE PLAN
It is anticipated that, prior to the Offering, the Company's Board of
Directors will adopt, and Kennametal, as the Company's sole shareholder, will
approve, the 1997 Plan.
In the judgment of the Board of Directors, it is important that the Company
be in a position to be able to grant stock options and, to make certain limited
stock awards in the form of shares, to directors, officers, employees and other
persons who are responsible for the Company's continued growth, development and
future financial success, in order to develop the sense of proprietorship
inherent in stock ownership by such persons, to reward prior performance and to
assist in the Company's efforts to recruit, retain and motivate high quality
persons. Furthermore, the Board believes that it is important to have the
ability to grant stock-based compensation to non-employee directors in order to
recruit and retain highly qualified directors and to further align their
interests with those of shareholders.
The following description is intended to summarize certain provisions of
the 1997 Plan. The full text of the 1997 Plan is set forth in an exhibit to the
Registration Statement of which this Prospectus is a part. The following
description is qualified in its entirety by reference to such exhibit.
Administration. The 1997 Plan provides that it may be administered by the
full Board of Directors or by a committee of the Board (the "Plan
Administrator"). Subject to the terms of the 1997 Plan, the Plan Administrator
will select persons to whom options will be granted and/or shares awarded. The
Plan Administrator will determine the type of option, the number of shares to be
included in each option, the option price and the period in which each option
may be exercised. The Plan Administrator also will determine the number of
shares to be awarded pursuant to the 1997 Plan and the terms and conditions
which must be met in order for such shares to vest.
Shares Available; Eligibility. The 1997 Plan authorizes the issuance of to
2,000,000 shares of Class A Common Stock, although the maximum number of shares
that can take the form of share awards is 100,000, subject to adjustment.
Options and shares may be granted under the 1997 Plan to directors, officers and
employees of the Company and its subsidiaries and of Kennametal and its
subsidiaries who, in the opinion of the Plan Administrator, are mainly
responsible for the continued growth, development and future financial success
of the Company. There currently are approximately 50 directors, officers and
employees of the Company and Kennametal who may be eligible generally under the
1997 Plan, including the Named Executive Officers. Other employees of the
Company or of Kennametal may receive options or shares under the 1997 Plan to
reward superior performance.
Stock Options. The 1997 Plan provides for the Plan Administrator, in its
discretion, to grant options either in the form of incentive stock options
qualified as such under the Code or other options.
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<PAGE> 46
The price at which each share covered by an option granted under the 1997
Plan may be purchased will be determined in each case by the Plan Administrator
but may not be less than the fair market value at the time the option is
granted. For options granted simultaneously with the Offering, the fair market
value will be the price at which the Class A Common Stock is offered to the
public. Thereafter, fair market value will be the mean between the highest and
lowest sales prices for the Class A Common Stock as reported on the New York
Stock Exchange--Composite Transactions reporting system for the date in question
or, if no sales were made on that date, on the next preceding date on which
sales were made.
If the optionee is an employee who ceases to be employed by the Company or
any of its subsidiaries, the option may be exercised only within three months
after the termination of employment and within the option period or, if such
termination was due to disability or retirement, within one year after
termination of employment and within the option period, unless such termination
of employment is for cause or in violation of an agreement by the optionee to
remain in the employ of the Company or the subsidiary, in which case the option
will terminate. In the discretion of the Plan Administrator, the option period
may be extended for up to three years from the date of termination regardless of
the original option period. Further, the option may be exercised only within 450
calendar days after the optionee's death and within the option period and only
by the optionee's personal representatives or persons entitled thereto under the
optionee's will or the laws of descent and distribution.
If an optionee is a non-employee director of the Company who ceases to
serve as a director of the Company and Kennametal, the option may be exercised
only within three months thereafter and within the option period or, if such
cessation was due to disability, within one year after cessation of service and
within the option period, unless such cessation of service was the result of
removal for cause, in which case the option will immediately terminate.
The Plan Administrator, in its discretion, may grant rights authorizing the
automatic issuance, upon exercise of an option granted under the 1997 Plan,
using previously owned shares, of additional stock options under the 1997 Plan
with an exercise price equal to the fair market value on the date of exercise
and for up to the number of shares delivered in payment of the exercise price of
the option. Such additional stock options must have the same option period as
the original option.
In consideration for the granting of each option, the optionee must agree
to remain in the employment of the Company or a subsidiary for at least one year
from the date of the granting of the option or until the first day of the month
coinciding with or next following the optionee's 65th birthday, whichever may be
earlier.
Share Awards. The Plan Administrator may from time to time award shares to
participants pursuant to share award agreements which may contain such terms and
conditions as the Plan Administrator determines. The aggregate maximum number of
shares of Class A Common Stock that may take the form of share awards is
100,000. The Plan Administrator may establish such vesting period, schedule and
criteria as it deems appropriate for each share award, such as vesting in
installments upon the achievement by the Company or grantee of specified periods
of continued employment, specific performance criteria or other goals; provided,
however, that any single award of shares to a participant in an amount greater
than 100 shares will vest only upon the grantee or the Company satisfying
specified performance goals. If the grantee or the Company, as the case may be,
fails to achieve the designated goals or the grantee ceases to be employed by
the Company for any reason prior to the expiration of the vesting period, the
grantee will forfeit all non-vested shares.
Allotment of Shares. Not more than 15% of the aggregate number of shares
subject to the 1997 Plan may be optioned or awarded in the aggregate to any one
individual excluding shares covered by an option previously granted to the
individual to the extent it has expired or terminated without being exercised
and excluding shares to the extent the award has terminated without such shares
having vested.
Change in Control. The 1997 Plan provides that in the event of a change in
control of the Company or Kennametal (as defined in the 1997 Plan), (i) all
options that become exercisable in installments will become immediately
exercisable in full, (ii) an optionee who ceases to be employed by the Company
or Kennametal or any of their respective subsidiaries within one year following
the change in control may in all events exercise
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<PAGE> 47
his or her options for a period of three months after the termination of
employment and within the option period and (iii) all awards of shares which
have not previously vested will become vested.
Amendment or Discontinuance. The Board of Directors may alter, amend,
suspend or discontinue the 1997 Plan, provided that no such action may deprive
any person without such person's consent of any rights granted under the 1997
Plan.
EMPLOYMENT AGREEMENTS
The Company intends to enter into agreements with each of the Named
Executive Officers whereby, subject to a provision for termination without cause
by either party upon written notice, they will be employed by the Company. The
agreements generally provide that the officers will devote their full time and
attention to the business and affairs of the Company and perform such services
as shall be determined by the Board of Directors, will refrain during employment
and for three years thereafter from competing with the Company (unless
employment is terminated by the Company without cause or following a change in
control), and will not disclose confidential or trade secret information
belonging to the Company. The agreements provide for severance payments upon
termination of employment occurring either before or after a change in control
of the Company.
In the event of termination of employment by the Company prior to a change
in control (and without cause), each officer would receive as severance pay an
amount equal to three months' base salary at the time of such termination. In
the event of termination of the employee prior to a change in control, or
without good reason following a change in control, no severance payments will be
made. In the event of termination of employment by the Company (other than for
cause or disability or by the employee with good reason at or after a change in
control of the Company or Kennametal), each officer would receive as severance
pay an amount equal to up to 2.8 (decreasing to zero if employment continues for
36 months following the change in control) times the sum of (i) his respective
annual base salary at the date of termination or, at the officer's election, his
salary as of the beginning of the month preceding the month in which the change
in control occurs, and (ii) the average of any bonuses which the officer was
entitled to be paid during the three most recent fiscal years ending prior to
the date of termination. The officer would receive the same medical and group
insurance benefits that he received at the date of termination for up to 36
months following the date of termination.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition in fiscal 1990 by Kennametal of J&L,
which is a wholly owned subsidiary of Kennametal and will become a wholly owned
subsidiary of the Company upon consummation of the Offering, Kennametal entered
into certain leases with Irwin L. Elson, a director of the Company, and parties
affiliated with Mr. Elson. As a result of these transactions, J&L leases office
and warehouse space in Livonia, Michigan from a general partnership in which Mr.
Elson is a partner. The initial term of the lease commenced on January 1, 1991
and continues to December 31, 2000. During fiscal 1996, J&L made aggregate lease
payments to that partnership under this lease of $613,000. J&L also leases
office and warehouse space in Mt. Prospect, Illinois, from a general partnership
comprised of Mr. Elson and other unrelated individuals. The initial lease term
commenced on August 1, 1988 and terminates on December 31, 1998. During fiscal
1996, J&L made aggregate lease payments to that partnership under this lease of
$311,000.
From July 1, 1996 until April 30, 1997, Mr. Elson was President of J&L. In
such capacity, he received a salary of approximately $175,000 for such period
and participated in Kennametal's benefit plans, including the Kennametal Inc.
Management Performance Bonus Plan. He also received stock options, first
exercisable after July 1, 1997, for 10,000 shares of Kennametal Capital Stock.
During fiscal 1994 and fiscal 1995, Mr. Elson was a consultant to and director
of J&L.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Robert L. McGeehan, who serves on the Compensation Committee, is president
and Chief Executive Officer of Kennametal.
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<PAGE> 48
The Company engages in business transactions with Kennametal and its
subsidiaries. Products purchased for resale from Kennametal and its subsidiaries
totaled $8.0 million in 1994, $11.4 million in 1995 and $18.0 million in 1996.
Sales to these entities totaled $8.5 million in 1994, $11.4 million in 1995 and
$11.4 million in 1996.
The Company receives from Kennametal certain warehouse, management
information systems, financial and administrative services. All amounts incurred
by Kennametal on behalf of the Company are reflected in operating expenses in
the Company's statements of income. In addition, costs charged to the Company by
Kennametal, totaling $3.4 million in 1994, $3.5 million in 1995 and $5.7 million
in 1996 are included in the Company's statements of income. Kennametal intends
to continue to provide services to the Company in the future in accordance with
the terms of the intercompany agreements described in "Relationship with
Kennametal." The amounts to be charged pursuant to these intercompany agreements
will reflect the actual costs of providing these services which will include the
additional costs associated with operating as a public company. However, the
increase in these charges is not expected to be material in the future.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDER AND MANAGEMENT
OWNERSHIP OF COMPANY COMMON STOCK BY PRINCIPAL SHAREHOLDER
No shares of Class A Common Stock were outstanding or beneficially owned
prior to the Offering. All of the 20,897,000 shares of Class B Common Stock
outstanding are beneficially owned by Kennametal. Accordingly, upon consummation
of the Offering, Kennametal will own Common Stock representing approximately
83.1% of the economic interest in the Company (80.5% if the Underwriters'
over-allotment option is exercised in full) and representing approximately 98.0%
of the combined voting power of the Company's outstanding Common Stock (or 97.6%
if the Underwriters' over-allotment option is exercised in full).
Immediately after the Offering, the only shares of Class A Common Stock
that will be outstanding are those that will be issued in the Offering
(including any shares issued upon exercise of the Underwriters' over-allotment
option).
The following table sets forth information with respect to the beneficial
ownership of the Company's Class B Common Stock as of the date of this
Prospectus:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) CLASS
--------------------------------------- --------------- -------------
<S> <C> <C>
Kennametal Inc.(3).............................................. 20,897,000 100
</TABLE>
- ---------
(1) The address of Kennametal is Route 981 at Westmoreland County Airport, P.O.
Box 231, Latrobe, Pennsylvania 15650.
(2) Because the Class B Common Stock is convertible by Kennametal into Class A
Common Stock on a one-for-one basis, such ownership also represents
beneficial ownership of Class A Common Stock. If the Underwriters'
over-allotment option is exercised, Kennametal has agreed to surrender to
the Company a number of its shares of Class B Common Stock which equals the
number of additional shares of Class A Common Stock purchased by the
Underwriters from the Company.
(3) See "Relationship with Kennametal" for a description of transactions and
arrangements between Kennametal and the Company.
OWNERSHIP OF KENNAMETAL AND COMPANY COMMON STOCK BY MANAGEMENT
The following table sets forth the beneficial ownership of the Kennametal
Capital Stock as of March 31, 1997, by each director of the Company, each
nominee for director of the Company, each Named Executive Officer and all
directors and executive officers of the Company as a group. None of such persons
owned any
47
<PAGE> 49
shares of the Company's Class A Common Stock or Class B Common Stock as of such
date. Options with respect to an aggregate of 450,000 shares of Class A Common
Stock will be awarded by the Company to its executive officers, directors and
employees effective upon consummation of the Offering. See "Management-- Board
Committees and Compensation" and "--Executive Compensation."
<TABLE>
<CAPTION>
TOTAL
AMOUNT AND BENEFICIAL
NATURE OF OWNERSHIP
BENEFICIAL PERCENTAGE DEFERRED FEE AND FEE PLAN
NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2)(3) OF CLASS PLAN SHARES SHARES
- ------------------------------------------ ------------------ ---------- ------------- ------------
<S> <C> <C> <C> <C>
Richard C. Alberding...................... 1,734(4) * -- 1,734
Jeffery M. Boetticher..................... -- * -- --
Irwin L. Elson............................ 3,000 * -- 3,000
Robert L. McGeehan........................ 263,049(5) 1.0% 6,718 269,767
Aloysius T. McLaughlin, Jr. .............. 24,791 * 4,920 29,711
William R. Newlin......................... 23,052(6) * 8,322 31,374
Michael W. Ruprich........................ 38,708 * 3,314 42,022
Kenneth M. McHenry........................ 6,139 * -- 6,139
Roland E. Lazzaro......................... 5,021 * -- 5,021
Michael J. Mussog......................... 4,095 * -- 4,095
Directors and Executive Officers as a
Group (10 persons)...................... 369,589(1) 1.4% 23,274 392,863
</TABLE>
- ---------
* Less than one percent.
(1) The figures shown include 216,507, 34,834, 6,000, 5,000, 4,000 and 270,841
shares of Kennametal Capital Stock over which Messrs. McGeehan, Ruprich,
McHenry, Lazzaro, Mussog and all directors and executive officers of the
Company as a group, respectively, have the right to acquire within 60 days
of March 31, 1997, pursuant to Kennametal's stock option plans.
(2) No individual beneficially owns in excess of one percent of the total shares
outstanding. Unless otherwise noted, the shares shown are subject to the
sole voting and investment power of the person named.
(3) In addition to these shares, Messrs. McGeehan, McLaughlin, Newlin and
Ruprich hold Kennametal Stock Credits (Deferred Fee Plan Shares) for an
aggregate of 23,374 shares of Kennametal Capital Stock to which they are
entitled at certain dates in the future pursuant to a Kennametal deferred
directors fee plan.
(4) All such shares are owned jointly by Mr. Alberding and his wife.
(5) The figure shown includes 8,214 shares owned jointly by Mr. McGeehan and his
wife.
(6) The figure shown includes 2,265 shares owned jointly by Mr. Newlin and his
wife.
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<PAGE> 50
RELATIONSHIP WITH KENNAMETAL
GENERAL
Upon completion of the Offering, Kennametal will own 100% of the
outstanding Class B Common Stock of the Company which will represent
approximately 98.0% of the combined voting power of all of the outstanding
Common Stock (or approximately 97.6% if the Underwriters' over-allotment option
is exercised in full). For so long as Kennametal continues to own shares of
Common Stock representing more than 50% of the combined voting power of the
Common Stock of the Company, Kennametal will be able, among other things, to
determine any corporate action requiring approval of holders of Common Stock
representing a majority of the combined voting power of the Common Stock,
including the election of the entire Board of Directors of the Company, certain
amendments to the Articles of Incorporation and By-Laws of the Company and
approval of certain mergers and other control transactions, without the consent
of the other shareholders of the Company. See "Description of Capital Stock."
In addition, through its control of the Board of Directors and beneficial
ownership of Common Stock, Kennametal will be able to control certain decisions,
including decisions with respect to the Company's dividend policy, the Company's
access to capital (including borrowing from third-party lenders and the issuance
of additional equity securities), mergers or other business combinations
involving the Company, the acquisition or disposition of assets by the Company
and any change in control of the Company. Kennametal has advised the Company
that its current intention is to continue to hold all of the Class B Common
Stock beneficially owned by it. Kennametal has no agreement with the Company not
to sell or distribute such shares, other than pursuant to the Purchase Agreement
in which Kennametal has agreed not to (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of Class A Common Stock or any
securities convertible into or exercisable or exchangeable for Class A Common
Stock (including Class B Common Stock) or file any registration statement under
the Securities Act with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the Class
A Common Stock or any securities convertible into or exercisable or exchangeable
for Class A Common Stock (including Class B Common Stock), whether any such swap
or transaction described in clause (i) or (ii) above is to be settled by
delivery of Class A Common Stock or such other securities, in cash or otherwise,
for a period of 180 days from the date of this Prospectus without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf
of the Underwriters, except for any shares of Class A Common Stock issued, or
options to purchase Class A Common Stock granted, pursuant to the Company's
employee benefit plans described herein. There can be no assurance concerning
the period of time during which Kennametal will maintain its beneficial
ownership of Common Stock.
Beneficial ownership of at least 80% of the total voting power and value of
the outstanding Common Stock is required in order for Kennametal to continue to
include the Company in its consolidated group for federal income tax purposes
and ownership of at least 80% of the total voting power and 80% of any class of
nonvoting capital stock is required in order for Kennametal to be able to effect
a Tax-Free Spin-Off. The Company's relationship with Kennametal will also be
governed by agreements to be entered into in connection with the Offering with
Kennametal, including an administrative services agreement, a lease agreement,
shared facilities agreements (subleases), a product supply agreement, the
Tax-Sharing Agreement, a trademark license agreement, an indemnification
agreement, a non-competition and corporate opportunities allocation agreement,
an intercompany debt/investment and cash management agreement, warehousing
agreements and a stock option and registration rights agreement, the material
terms of which are described below. It is anticipated that such agreements will
be entered into concurrently with the consummation of the Offering. Management
believes the fees and other amounts paid to Kennametal under such agreements
will not exceed the amounts that would be paid if such services or products were
provided by an independent third party and which are consistent in all material
respects with the allocation of the costs of such services set forth in the
historical financial statements of the Company. See the Consolidated Financial
Statements included elsewhere herein. Management's estimate of the net charge
for service fees and other amounts that would have been payable by the Company
to Kennametal in fiscal 1996 if the Services Agreement had been in effect
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<PAGE> 51
during that period is approximately $5.7 million, which is approximately the
amount included in the fiscal 1996 Consolidated Financial Statements.
With respect to matters covered by the Services Agreement, the relationship
between Kennametal and the Company is intended to continue in a manner generally
consistent with past practices. NOTWITHSTANDING MANAGEMENT'S BELIEF THAT THE
PRICES CHARGED WOULD NOT EXCEED THE PRICES THAT WOULD BE CHARGED BY A THIRD
PARTY, BECAUSE THE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF KENNAMETAL, NONE OF
THESE ARRANGEMENTS WILL RESULT FROM ARM'S LENGTH NEGOTIATIONS, AND THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE PRICES CHARGED TO THE COMPANY AT A PARTICULAR
POINT IN TIME FOR SERVICES PROVIDED THEREUNDER MAY BE HIGHER OR LOWER THAN
PRICES THAT MAY BE CHARGED BY A THIRD PARTY.
The descriptions set forth below are intended to be summaries, and while
material terms of the agreements are set forth herein, the descriptions are
qualified in their entirety by reference to the forms of the relevant agreement
filed as exhibits to the Registration Statement of which this Prospectus is a
part. The Articles of Incorporation also contain provisions relating to the
allocation of business opportunities that may be suitable for either of
Kennametal or the Company and to the approval of transactions between the
Company and Kennametal. For additional information concerning the
above-mentioned provisions of the Articles of Incorporation and circumstances
under which the Class B Common Stock may be converted into Class A Common Stock,
see "Description of Capital Stock."
ADMINISTRATIVE SERVICES AGREEMENT
The Company and Kennametal will enter into an intercompany administrative
services agreement (the "Services Agreement") with respect to services to be
provided by Kennametal to the Company. The Services Agreement provides that such
services will be provided in exchange for fees which, generally, (i) in the case
of services purchased by Kennametal from third parties for the Company, will be
based upon the incremental cost charged by such third parties to Kennametal for
such services provided to the Company and (ii) in the case of services directly
provided by Kennametal, will be based on the estimated costs, including a
reasonable allocation of direct and indirect overhead costs, incurred by
Kennametal for the services it provides directly to the Company. Such fees will
be paid monthly in arrears. The Company may request an expansion or termination
of services, in which case the parties will discuss, without obligation, the
provision or termination of such services and an appropriate charge or reduction
in charges for such services. The purpose of the Services Agreement is to ensure
that Kennametal continues to provide to the Company the range of services that
Kennametal provided to the Company prior to the Offering. With respect to
matters covered by the Services Agreement, the relationship between Kennametal
and the Company is intended to continue in a manner generally consistent with
current practices. The services initially to be provided by Kennametal to the
Company include, among other things, certain treasury, general accounting and
administrative services including, tax, risk management, human resources, legal,
internal audit, marketing, executive time and space, and information systems
services.
The Services Agreement also provides that Kennametal will arrange and
administer all existing insurance arrangements and may continue coverage of the
Company under Kennametal's insurance policies and will allow eligible employees
of the Company to participate in all of Kennametal's benefit plans. In addition,
under the Services Agreement, the Company will reimburse Kennametal for the
portion of Kennametal's premium cost with respect to such insurance that is
attributable to coverage of the Company and reimburse Kennametal for
Kennametal's costs (including any contributions and premium costs and including
certain third-party expenses and allocation of certain personnel expenses of
Kennametal), generally in accordance with past practice, relating to
participation by the Company's employees in any of Kennametal's benefit plans.
The Services Agreement will have an initial term of 10 years and will be
renewed automatically thereafter for successive one-year terms, provided
however, that after the initial 10-year term or any renewal term, the Services
Agreement may be terminated at the end of such initial term or any subsequent
renewal term by either party upon six months' prior written notice. The Services
Agreement also provides that it will be subject
50
<PAGE> 52
to early termination by Kennametal if: (i) Kennametal or its affiliates own
Common Stock representing less than a majority of the voting power of all Common
Stock, (ii) any person or group, other than Kennametal or its affiliates,
directly or indirectly has the power to exercise a controlling influence over
the Company or (iii) a majority of the directors of the Company were neither
nominated by Kennametal or by the Company's Board of Directors nor appointed by
directors so nominated. The Services Agreement also may be terminated by the
non-breaching party if the other party materially breaches its terms.
Pursuant to the Services Agreement, for the term of and for a period of
five years following the termination of the Services Agreement, each party will
agree to indemnify the other, except in certain limited circumstances, against
liabilities that the other may incur by reason of or related to such party's
failure to perform its obligations under the Services Agreement.
LEASE AGREEMENT
The Company and Kennametal will enter into a lease agreement (the "Lease
Agreement") pursuant to which Kennametal will lease to the Company space within
buildings located on Kennametal's premises. The Company will use such space for
the display and retail sale of metalworking consumables and related products, as
well as for ancillary office and storage use. The Company may not use the
premises for any other purpose or business without the prior consent of
Kennametal. The Company is required to indemnify Kennametal against certain
liabilities in respect of the use of the premises. The Lease Agreement will
remain in effect for a term of 10 years, but may be extended for successive
one-year terms by the Company upon written notice to Kennametal. Kennametal may
terminate the Lease Agreement if (i) the Company owns shares representing less
than a majority of the voting power of the outstanding common stock of J&L, (ii)
Kennametal or its affiliates, own Common Stock representing less than a majority
of the voting power of all Common Stock, (iii) any person or group, other than
Kennametal or its affiliates, directly or indirectly has the power to exercise a
controlling influence over the Company or (iv) a majority of the directors of
the Company were neither nominated by Kennametal or by the Company's Board of
Directors nor appointed by directors so nominated. The Lease Agreement also may
be terminated by the non-breaching party if the other party materially breaches
its terms.
SHARED FACILITIES AGREEMENTS
The Company and Kennametal will enter into Shared Facilities Agreements
(the "Shared Facilities Agreements") pursuant to which each company will
sublease to the other company the facilities which are leased by either of the
companies and shared with the other company. See "Business--Properties". The
Shared Facilities Agreements provide that the relevant sublessor will lease
space to the sublessee at a rental rate equal to a pro rata share (based on
square feet occupied) of all costs and expenses (principally fixed rent) under
the relevant lease. The Company's management believes that the rental rates
payable by the Company are commensurate with market rates, although the Company
did not seek bids from third parties. Management estimates that in fiscal 1996
the Company would have owed Kennametal rent, net of the rent that Kennametal
would pay the Company, if the Shared Facilities Agreements had been in effect
during that period, of approximately $0.5 million, which amount is included in
the fiscal 1996 Consolidated Financial Statements. The Shared Facilities
Agreements provide for a term, with respect to each subleased facility, equal to
the term of the underlying lease.
PRODUCT SUPPLY AGREEMENT
The Company and Kennametal will enter into a product supply agreement (the
"Supply Agreement") which has a term of 10 years pursuant to which Kennametal
agrees to supply and the Company agrees to purchase from Kennametal all of the
Company's requirements for metalworking consumables and related products
direct-marketed by the Company and Kennametal further agrees to supply all
metalworking consumables and related products requested pursuant to Full Service
Supply Programs, except as otherwise agreed from time to time between the
Company and Kennametal. The Company will be entitled to purchase products for
its direct-marketing business at prices discounted from Kennametal's published
price for each such product depending upon the volume of each such product
purchased by the Company. The gross margin
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realized by the Company from the sale of products purchased from Kennametal and
resold in the Company's direct-marketing program will slightly exceed the gross
margin which the Company realizes on all products resold in the direct-marketing
program. The Articles of Incorporation contain similar provisions regarding
product supply. See "Description of Capital Stock--Certain Provisions of the
Articles and By-Laws-- Limitations on the Company's Business Activities."
Pursuant to the Corporate Opportunities Agreement, Kennametal has agreed that,
with the exception of existing relationships, Kennametal will not sell,
distribute or otherwise make available Kennametal products to any person that
competes with the Company. The Supply Agreement will remain in effect for a term
of 10 years, but may be earlier terminated by either party if Kennametal or its
affiliates own Common Stock representing less than a majority of the voting
power of all Common Stock or if the other party materially breaches the Product
Supply Agreement or the Non-Competition and Corporate Opportunities Allocation
Agreement.
TAX-SHARING AGREEMENT
The Company is, and after the Offering will continue to be, included in
Kennametal's federal consolidated income tax group and the Company's tax
liability will be included in the consolidated federal income tax liability of
Kennametal and its subsidiaries. In certain circumstances, certain of the
Company's subsidiaries may be included with certain subsidiaries of Kennametal
in combined, consolidated or unitary income tax groups for state and local tax
purposes. The Company and Kennametal intend to enter into the Tax-Sharing
Agreement. Pursuant to the Tax-Sharing Agreement, the Company will make payments
to Kennametal such that, with respect to any period, the amount of taxes to be
paid by the Company, subject to certain adjustments, will be determined as
though the Company were to file separate federal, state and local income tax
returns (including, except as provided below, any amounts determined to be due
as a result of a redetermination of the tax liability of Kennametal arising from
an audit or otherwise) as the common parent of an affiliated group of
corporations filing combined, consolidated or unitary (as applicable) federal,
state and local returns rather than a consolidated subsidiary of Kennametal with
respect to federal, state and local income taxes. The Company will be
reimbursed, however, for tax attributes that it generates, such as net operating
losses, if and when they are used on a consolidated basis.
Kennametal will continue to have all the rights of a parent of a
consolidated group (and similar rights provided for by applicable state and
local law with respect to a parent of a combined, consolidated or unitary
group), will be the sole and exclusive agent for the Company in any and all
matters relating to the income, franchise and similar tax liabilities of the
Company, will have sole and exclusive responsibility for the preparation and
filing of consolidated federal and consolidated or combined state income tax
returns (or amended returns), and will have the power, in its sole discretion,
to contest or compromise any asserted tax adjustment or deficiency and to file,
litigate or compromise any claim for refund on behalf of the Company. In
addition, Kennametal has agreed to undertake to provide the aforementioned
services with respect to the Company's separate state and local income tax
returns and the Company's foreign income tax returns. Under the Services
Agreement, the Company will pay Kennametal a fee intended to reimburse
Kennametal for all direct and indirect costs and expenses incurred with respect
to the Company's share of the overall costs and expenses incurred by Kennametal
with respect to tax related services.
In general, the Company will be included in Kennametal's consolidated group
for federal income tax purposes for so long as Kennametal beneficially owns at
least 80% of the total voting power and value of the outstanding Common Stock.
Each member of a consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, although the Tax-Sharing Agreement allocates tax liabilities
between the Company and Kennametal, during the period in which the Company is
included in Kennametal's consolidated group, the Company could be liable in the
event that any federal tax liability is incurred, but not discharged, by any
other member of Kennametal's consolidated group.
TRADEMARK LICENSE AGREEMENT
The Company and Kennametal will enter into a trademark license agreement
(the "License Agreement"). The License Agreement provides, among other things,
for the grant to the Company by Kennametal
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of a non-exclusive license to use the trademarks service marks, trade names and
other intellectual property (collectively, the "Marks") of Kennametal identified
therein in connection with the Company's business and for the grant to
Kennametal by the Company of a non-exclusive license to use the Company's Marks
on similar terms. Under the terms of the License Agreement, each party will
indemnify the other and its affiliates against certain liabilities in respect of
the use of the Marks. The License Agreement will remain in effect for a term of
10 years, but may be earlier terminated by Kennametal if Kennametal or its
affiliates own Common Stock representing less than a majority of the voting
power of all Common Stock or by either party if the other party materially
breaches the License Agreement or any of the other intercompany agreements. A
termination of the License Agreement could have a material adverse effect on the
business, financial condition or results of operation of the Company.
INDEMNIFICATION AGREEMENT
The Company and Kennametal will enter into an indemnification agreement
(the "Indemnification Agreement"). Under the Indemnification Agreement, subject
to limited exceptions, the Company is required to indemnify Kennametal and its
directors, officers, employees, agents and representatives for liabilities under
federal or state securities laws as a result of the Offering, including
liabilities arising out of or based upon alleged misrepresentations in or
omissions from the Registration Statement, of which this Prospectus is a part.
The Indemnification Agreement also provides that each party thereto (the
"Indemnifying Party") will indemnify the other party thereto and its directors,
officers, employees, agents and representatives (the "Indemnified Party") for
liabilities that may be incurred by the Indemnified Party relating to, resulting
from or arising out of (i) the businesses and operations conducted or formerly
conducted, or assets owned or formerly owned, by the Indemnifying Party and its
subsidiaries (except, in the case where Kennametal is the Indemnifying Party,
such businesses, operations and assets of the Company and its subsidiaries) or
(ii) the failure by the Indemnifying Party to comply with any other agreements
executed in connection with the Offering, except to the extent caused by the
Indemnified Party.
The Indemnification Agreement also provides that the Company will indemnify
Kennametal for any liabilities incurred under guarantees of leases.
NON-COMPETITION AND CORPORATE OPPORTUNITIES ALLOCATION AGREEMENT
Pursuant to a Non-Competition and Corporate Opportunities Agreement (the
"Corporate Opportunities Agreement") to be entered into between Kennametal and
the Company: (i) Kennametal agrees for as long as the other intercompany
agreements remain in effect (whose current term is 10 years) (A) not to compete
with the Company in the business of direct marketing of a broad range of
metalworking consumables and related products through catalogs, monthly
promotional flyers, additional mailings and advertisements, telemarketing
efforts, direct-sales efforts and showrooms targeted at small and medium-sized
metalworking shops as well as the supply of consumable tooling and related
metalworking products at designated manufacturing plants of large industrial
customers through integrated industrial supply programs (the "Base Business"),
except where the Company has been offered by Kennametal or its affiliates or a
third party the right to acquire a business which falls under the Base Business
at fair market value, and the Company's Board of Directors has determined, for
whatever reason, that the Company shall not acquire such business and (B) not to
sell, offer to sell, distribute or otherwise make available Kennametal
manufactured and branded products to anyone who intends to direct market such
products and therefore competes with the Company's direct-marketing program
except with respect to those contracts, arrangements or relationships in
existence on the date of the Corporate Opportunities Agreement or with the prior
written consent of the Company; and (ii) the Company agrees for as long as the
other intercompany agreements remain in effect not to sell, offer to sell,
distribute or otherwise make available any products which compete directly or
indirectly with Kennametal without the prior written consent of Kennametal,
except in connection with the provision of integrated industrial supply programs
as may be required specifically by customers thereof. Similar provisions are
contained in the Articles of Incorporation. See "Description of Capital
Stock--Certain Provisions of the Articles of By-Laws--Limitation on the
Company's Business Activities."
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The Corporate Opportunities Agreement provides that Kennametal will have
the right to any future business opportunities outside the scope of the Base
Business, and will have the right as to any future business opportunities
outside the scope of the Base Business but which are reasonably related to the
Base Business, to determine the allocation thereof based solely upon
Kennametal's evaluation of what is in the best interests of Kennametal under the
circumstances. Under such agreement, the good faith determination of Kennametal
as to the scope of the Base Business, the applicability of any exceptions
discussed above to its agreement not to compete, or the allocation of any
corporate opportunities outside the scope of the Base Business, will be
conclusive and binding. The Corporate Opportunities Agreement will remain in
effect for a term of 10 years, but may be earlier terminated by Kennametal if
Kennametal or its affiliates own Common Stock representing less than a majority
of the voting power of all Common Stock or if the Company materially breaches
the Corporate Opportunities Agreement or the Product Supply Agreement. The
Articles of Incorporation also restrict the Company's ability to pursue future
business opportunities. See "Description of Capital Stock--Certain Provisions
of the Articles and By-Laws--Corporate Opportunities."
INTERCOMPANY DEBT/INVESTMENT AND CASH MANAGEMENT AGREEMENT
The Company and Kennametal will enter into an intercompany debt/investment
and cash management agreement (the "Cash Management Agreement") under which the
Company will continue to participate in Kennametal's centralized cash management
system. The Cash Management Agreement provides for a daily transfer from the
Company's cash accounts to Kennametal's centralized cash accounts and daily
funding of the disbursements of the Company from such Kennametal cash account.
The Company will receive interest on net cash flows to Kennametal's centralized
cash accounts and be charged interest on net borrowings from the Kennametal
centralized cash accounts at a rate equal to the all-in interest rate available
to Kennametal from outside sources for short term borrowings or investments,
depending upon the overall position of the centralized cash accounts. The
Company will pay for this service pursuant to the Services Agreement and will
reimburse Kennametal for an allocable portion of Kennametal's facility and/or
commitment fees under its credit lines. The Cash Management Agreement will
remain in effect for a term of 10 years, but may be earlier terminated by
Kennametal if Kennametal or its affiliates own Common Stock representing less
than a majority of the voting power of all Common Stock or by either party if
the other party materially breaches the Cash Management Agreement or any of the
other intercompany agreements.
WAREHOUSING AGREEMENTS
The Company and Kennametal will enter into separate warehousing agreements
("Warehousing Agreements") with respect to (i) Kennametal distribution centers
and warehouses which store products for the Company and (ii) Company
distribution centers and warehouses that store products for Kennametal. The
terms of each Warehousing Agreement provide for the warehouser to store the
warehousee's products in the warehouses segregated and separate from the
warehouser's products and, upon request by the warehousee, to ship its products
from these warehouses to the warehousee's customers. The warehousee will pay to
the warehouser a charge for each of the products picked, packed and shipped
based upon an allocation of costs (including overhead) incurred by the
warehouser at these warehouses. The Warehousing Agreements will remain in effect
for a term of 10 years, but may be earlier terminated by Kennametal if (i)
Kennametal or its affiliates own Common Stock representing less than a majority
of the voting power of all Common Stock or (ii) if the Company owns shares
representing less than a majority of the voting power of the outstanding common
stock of J&L. The Warehousing Agreements may also be terminated by either party
if the other party materially breaches such Warehousing Agreement or any of the
other intercompany agreements.
CORPORATE AGREEMENT
The Company and Kennametal will enter into a corporate agreement (the
"Corporate Agreement") under which the Company grants to Kennametal a continuing
option, transferable, in whole or in part, to any of its affiliates, to
purchase, under certain circumstances, additional shares of Class B Common Stock
or Class A Common Stock (the "Stock Option"). The Stock Option may be exercised
by Kennametal simultaneously with the issuance of any equity security of the
Company (other than in the Offering or upon
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the exercise of the Underwriters' over-allotment option) or immediately prior to
a Tax-Free Spin-Off to the extent necessary to maintain its then existing
percentage of the total voting power and economic value of the Company at 80% of
all outstanding Common Stock or, in connection with a Tax-Free Spin-Off, in
order to acquire stock ownership necessary to effect a Tax-Free Spin-Off. The
purchase price of the shares of Common Stock purchased upon any exercise of the
Stock Option, subject to certain exceptions, will be based on the market price
of the Class A Common Stock. The Stock Option expires on the Control Termination
Date. The Company does not intend to issue additional shares of Class B Common
Stock except pursuant to the exercise of the Stock Option and as permitted by
any law, rule or regulation to which the Company is subject.
The Corporate Agreement further provides that, upon the request of
Kennametal, the Company will use its best efforts to effect the registration
under the applicable federal and state securities laws of any of the shares of
Common Stock (and any other securities issued in respect of or in exchange for
either) held by Kennametal for sale in accordance with Kennametal's intended
method of disposition thereof and will take such other actions necessary to
permit the sale thereof in other jurisdictions, subject to certain limitations
specified in the Corporate Agreement. Although as of the date of this
Prospectus, Kennametal has no current plan or intention other than to hold its
shares of Class B Common Stock for the foreseeable future, Kennametal will also
have the right, which it may exercise at any time and from time to time, to
include the shares of Class A Common Stock (and any other securities issued in
respect of or in exchange for either) held by it in certain other registrations
of common equity securities of the Company initiated by the Company on its own
behalf or on behalf of its other shareholders. The Company will agree to pay all
out-of-pocket costs and expenses (other than underwriting discounts and
commissions) in connection with each such registration that Kennametal requests
or in which Kennametal participates. Subject to certain limitations specified in
the Corporate Agreement, such registration rights will be assignable by
Kennametal and its assigns. The Corporate Agreement contains indemnification and
contribution provisions (i) by Kennametal and its permitted assigns for the
benefit of the Company and related persons and (ii) by the Company for the
benefit of Kennametal and the other persons entitled to effect registrations of
Common Stock and related persons.
The Corporate Agreement provides that for so long as Kennametal maintains
beneficial ownership of at least 40% of the number of outstanding shares of
Common Stock, the Company may not take any action or enter into any commitment
or agreement which may reasonably be anticipated to result, with or without
notice and with or without lapse of time or otherwise, in a contravention or an
event of default by Kennametal of (i) any provision of applicable law or
regulation, including but not limited to provisions pertaining to the Code or
ERISA, (ii) any provision of Kennametal's Articles of Incorporation or
Kennametal's By-Laws, (iii) any credit agreement or other material instrument
binding upon Kennametal or (iv) any judgment, order or decree of any
governmental body, agency or court having jurisdiction over Kennametal or any of
its affiliates or any of their respective assets.
The Corporate Agreement also provides that if the Underwriters exercise
their over-allotment option to acquire additional shares of Class A Common
Stock, Kennametal will surrender a number of its shares of Class B Common Stock
which equals the number of additional shares of Class A Common Stock purchased
by the Underwriters from the Company.
CONFLICTS OF INTEREST
Conflicts of interest may arise between the Company and Kennametal in a
number of areas relating to their past and ongoing relationships, including
potential acquisitions of businesses or properties, potential competitive
business activities, the election of new or additional directors, payment of
dividends, incurrence of indebtedness, tax matters, financial commitments,
marketing functions, indemnity arrangements, registration rights, administration
of benefits plans, service arrangements, issuances of capital stock of the
Company, sales or distributions by Kennametal of its remaining shares of Common
Stock and the exercise by Kennametal of its ability to control the management
and affairs of the Company. The Company cannot engage in the manufacture of
metalcutting tools and inserts and other related products in which Kennametal is
engaged. The Articles of Incorporation and the Corporate Opportunities Agreement
contain certain noncompete provisions. Circumstances could arise, however, in
which the Company and Kennametal would engage in activities in competition with
one another.
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The Company and Kennametal may enter into material transactions and
agreements in the future in addition to those described above. The Board will
utilize such procedures in evaluating the terms and provisions of any material
transactions between the Company and Kennametal or its affiliates as the Board
may deem appropriate in light of its fiduciary duties under state law. Depending
on the nature and size of the particular transaction, in any such evaluation,
the Board may rely on management's statements and opinions and may or may not
utilize outside experts or consultants or obtain independent appraisals or
opinions.
Four of the six current directors of the Company are also directors of
Kennametal, including Kennametal's Chairman, William R. Newlin, and Kennametal's
Chief Executive Officer, Robert L. McGeehan. Directors of the Company who are
also directors of Kennametal will have conflicts of interest with respect to
matters potentially or actually involving or affecting the Company and
Kennametal, such as acquisitions, financing and other corporate opportunities
that may be suitable for the Company and Kennametal. To the extent that such
opportunities arise, such directors may consult with their legal advisors and
make a determination after consideration of a number of factors, including
whether such opportunity is presented to any such director in his capacity as a
director of the Company, whether such opportunity is within the Company's line
of business or consistent with its strategic objectives and whether the Company
will be able to undertake or benefit from such opportunity. In addition,
determinations may be made by the Board, when appropriate, by the vote of the
disinterested directors only. Notwithstanding the foregoing, there can be no
assurance that conflicts will be resolved in favor of the Company.
So long as the Company remains a subsidiary of Kennametal, the directors
and officers of the Company will, subject to certain limitations, be indemnified
by Kennametal and insured under insurance policies maintained by Kennametal
against liability for actions taken or omitted to be taken in their capacities
as directors and officers of the Company, including actions or omissions that
may be alleged to constitute breaches of the fiduciary duties owed by such
persons to the Company and its shareholders. This insurance may not be
applicable to certain of the claims which Kennametal may have against the
Company pursuant to the Indemnification Agreement or otherwise. It is
contemplated that, in the event that Kennametal ceases to own in excess of a
majority of the voting power of the Common Stock, the Company will obtain its
own insurance coverage for its directors and officers in respect of such matters
comparable to that currently provided by Kennametal.
KENNAMETAL'S ALTERNATIVES FOR ITS SHARES OF COMMON STOCK
As of the date of this Prospectus, Kennametal has no current plan or
intention other than to hold its shares of Class B Common Stock for the
foreseeable future. After the date of the Offering, options which may be
considered by Kennametal regarding its interest in the Company include whether
to sell all or a portion of its shares of Common Stock to the public in a
subsequent public offering or to a strategic investor or to distribute pro rata
to its shareholders its remaining shares of Common Stock by a dividend intended
to be tax-free for federal income tax purposes to Kennametal's shareholders and
to Kennametal. See "Description of Capital Stock--Common Stock."
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (a)(i) 75,000,000
shares of Class A Common Stock, par value $.01 per share, of which no shares are
outstanding as of the date hereof and (ii) 50,000,000 shares of Class B Common
Stock, par value $.01 per share, of which one share is outstanding as of the
date hereof, and (b) 25,000,000 shares of Preferred Stock, par value $.01 per
share (the "Preferred Stock"), of which no shares are outstanding as of the date
hereof. Of the 75,000,000 shares of Class A Common Stock authorized, 4,257,000
are being offered hereby (4,897,000 shares if the Underwriters' over-allotment
option is exercised in full), and 20,897,000 shares are reserved for issuance
upon conversion of Class B Common Stock into Class A Common Stock. Of the
50,000,000 shares of Class B Common Stock authorized, 20,897,000 shares will be
held by Kennametal upon consummation of the Offering (20,257,000 if the
Underwriter's over-allotment option is exercised in full). A description of the
material terms and provisions of the Articles of Incorporation affecting the
relative rights of the Class A Common Stock, the Class B Common Stock and the
Preferred Stock is set forth below. The following summary description of the
capital stock of the Company is qualified in its entirety by reference to the
Articles and the By-Laws, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
Voting Rights. The holders of Class A Common Stock and Class B Common Stock
generally have identical rights, except that holders of Class A Common Stock are
entitled to one vote per share, while holders of Class B Common Stock are
entitled to 10 votes per share, on all matters to be voted on by the
shareholders. Generally, all matters to be voted on by the shareholders must be
approved by a majority of the votes cast by the holders of all shares of Class A
Common Stock and Class B Common Stock present in person or represented by proxy,
voting together as a single class, subject to any voting rights granted to
holders of any Preferred Stock. Except as otherwise provided by law, and subject
to any voting rights granted to holders of any outstanding Preferred Stock,
amendments to the Articles must be approved by a majority of the combined votes
cast by the holders of all shares of Class A Common Stock and Class B Common
Stock present in person or represented by proxy, voting together as a single
class. However, amendments to the Articles that would alter or change the
powers, preferences or special rights of the Class A Common Stock or the Class B
Common Stock so as to affect them adversely also must be approved by a majority
of the votes cast by the holders of the shares affected by the amendment present
in person or represented by proxy, voting as a separate class. In addition,
approval of certain other transactions with persons other than Kennametal and
its affiliates will require the approval of a majority of certain shareholders.
See "--Certain Provisions of the Articles and By-Laws--Change of Control
Provisions--PBCL Anti-Takeover Provisions."
Board Classification and Cumulative Voting. In accordance with the terms of
the Articles, prior to the Control Termination Date, members of the Board of
Directors of the Company will hold office for one year terms, will be elected at
each annual meeting of the shareholders of the Company and shareholders will not
be entitled to cumulate their votes in the election of directors. On or as
reasonably practicable after the Control Termination Date, the Board will be
divided into three classes designated as Class I, Class II and Class III,
respectively, with staggered three-year terms of office. At each annual meeting
thereafter, directors who are elected to succeed the class of directors whose
terms expire at that meeting will be elected for three-year terms and
shareholders will have cumulative voting rights (i.e., in voting for directors
each shareholder multiplies the total number of votes which its shares represent
by the number of directors to be elected and is entitled to cast the entire
number of votes so determined for one nominee or to distribute them among the
nominees in such proportion as the shareholder may determine). This
classification of the Board and cumulative voting will help to ensure continuity
and stability of corporate leadership and policy of the Company after Kennametal
has divested itself of a controlling interest in the Company. The classification
of the Board will also have the effect, however, of increasing the period of
time before each member of the Board will be re-elected or can be replaced,
which may have the effect of frustrating persons seeking to effect a takeover or
assume control of the Board.
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Dividends. Holders of Class A Common Stock and Class B Common Stock will
share ratably in any dividends declared by the Board, subject to any
preferential rights of any outstanding Preferred Stock. Dividends consisting of
shares of Class A Common Stock and Class B Common Stock may be paid only as
follows: (i) shares of Class A Common Stock may be paid only to holders of
shares of Class A Common Stock, (ii) shares of Class B Common Stock may be paid
only to holders of shares of Class B Common Stock, and (iii) shares shall be
paid proportionally with respect to each outstanding share of Class A Common
Stock and Class B Common Stock.
Dividends may be paid on the Common Stock if, when and as determined by the
Board from time to time out of any funds legally available therefor. Under the
Pennsylvania Business Corporation Law of 1988, as amended (the "PBCL"), a
dividend may not be paid if the Company is at the time insolvent or would be
insolvent after the payment of such dividend.
The Company intends to retain its future earnings to finance the
development, expansion and growth of its business and does not presently intend
to pay cash dividends to the holders of Class A Common Stock in the foreseeable
future. The payment of future dividends on the Class A Common Stock, if any,
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements, the
general financial condition of the Company, general business conditions and
limitations imposed by Pennsylvania law. See "Dividend Policy." By virtue of its
stock ownership, Kennametal will have the ability to change the size and
composition of the Board and thereby control the payments of dividends by the
Company.
Conversion. Each share of Class B Common Stock will convert into one share
of Class A Common Stock (i) while such share of Class B Common Stock is held by
Kennametal, at the option of Kennametal prior to a Tax-Free Spin-Off, (ii)
automatically on the Control Termination Date if it occurs prior to a Tax-Free
Spin-Off, and (iii) automatically upon a transfer by Kennametal to a person
other than an affiliate of Kennametal or upon any Kennametal affiliate holding
such share ceasing to be a Kennametal affiliate, except for a disposition
effected in connection with a transfer of Class B Common Stock to shareholders
of Kennametal as a dividend in a transaction intended to be tax-free under the
Code (a "Tax-Free Spin-Off") to Kennametal and its shareholders. If Kennametal
determines to effect a Tax-Free Spin-Off and in its discretion determines that
it could effect a Tax-Free Spin-Off by distribution of the shares of Class A
Common Stock into which the Class B Common Stock can be converted, Kennametal
will convert its Class B Common Stock into Class A Common Stock immediately
prior to such Tax-Free Spin-Off and distribute such shares of Class A Common
Stock rather than shares of Class B Common Stock to its shareholders. At
present, the Code requires, among other matters, that a company have beneficial
ownership of at least 80% of the voting power of outstanding common stock in
order for a spin-off to be tax-free under the Code.
Following a Tax-Free Spin-Off of the Class B Common Stock, shares of Class
B Common Stock will automatically convert into shares of Class A Common Stock on
the fifth anniversary of the Tax-Free Spin-Off, unless prior to such Tax-Free
Spin-Off, Kennametal delivers to the Company written advice of counsel
reasonably satisfactory to the Company (which shall include Kennametal's General
Counsel) to the effect that either (i) such conversion could adversely affect
the ability of Kennametal to obtain a favorable ruling from the Internal Revenue
Service (the "IRS") that the distribution would be a Tax-Free Spin-Off or (ii)
the IRS has adopted a general non-ruling policy on tax-free spin-offs and that
such conversion could adversely affect the status of the distribution as a
Tax-Free Spin-Off. If such written advice is received, approval of such
conversion will be submitted to a vote of the holders of the Company's Common
Stock as soon as practicable after the fifth anniversary of the Tax-Free
Spin-Off unless Kennametal delivers to the Company written advice of counsel
reasonably satisfactory to the Company (which shall include Kennametal's General
Counsel) prior to such anniversary that such vote would adversely affect the
status of the distribution as a Tax-Free Spin-Off, including the ability to
obtain a favorable ruling from the IRS; if such written advice is delivered, the
Company shall call no such meeting, no such meeting shall be held and no such
vote shall be taken. Approval of such conversion will require the affirmative
vote of the holders of a majority of the shares of both the Company's Class A
Common Stock and Class B Common Stock present and voting, voting together as a
single class, with each share entitled to one vote for such purpose. No
assurance can be given that such
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conversion would be consummated. Kennametal has no current plans with respect to
a Tax-Free Spin-Off of the Company.
The foregoing requirements are intended to ensure that tax-free treatment
of the Tax-Free Spin-Off is preserved should the IRS challenge such automatic
conversion as violating the 80% vote requirement currently required by the Code
for a tax-free spin-off. Similarly, the requirement to submit a conversion to a
vote of the holders of Common Stock is intended to preserve such tax treatment
should the IRS challenge such automatic conversion as violating the 80% vote
requirement.
All conversions will be effected on a share-for-share basis. Automatic
conversion of the Class B Common Stock into Class A Common Stock if a Tax-Free
Spin-Off has not occurred on the Control Termination Date is intended to ensure
that Kennametal retains voting control by virtue of its ownership of Class B
Common Stock only if it has a material economic interest in the Company.
In addition, in order to give any holder of the Class A Common Stock or
Class B Common Stock the right to participate in any offer for a significant
amount of the shares of the other class that is not similarly offered for the
shares of such holder's class, shares of Common Stock of each class will be
convertible, at the option of the registered holder thereof, on a
share-for-share basis, into shares of the other class if any person (other than
Kennametal and, in the case of Class A Common Stock, only following a Tax-Free
Spin-Off), or any group of persons agreeing to act together for the purpose of
acquiring, holding, voting or disposing of shares of Common Stock (other than
Kennametal or any one or more of its affiliates), makes an offer, which the
Board deems to be a bona fide offer, to purchase five percent or more of the
other class of Common Stock for cash and/or other securities or property without
making a similar offer for the shares of such class. The shares of Common Stock
of a class may be so converted only during the period in which such bona fide
offer is in effect. Any share of Common Stock so converted and not acquired by
the offeror prior to the termination, rescission or completion of the offer will
automatically reconvert to a share of the class from which it was converted upon
such termination, rescission or completion.
Other Rights. In the event of a voluntary or involuntary liquidation,
dissolution or winding-up of the Company, the holders of shares of Common Stock
will be entitled to share in all assets of the Company remaining after the
payment of its liabilities, subject to prior distribution rights and payment of
any distributions owing to holders of shares of Preferred Stock then
outstanding, if any. No shares of either class of Common Stock are subject to
redemption or have preemptive rights to purchase additional shares of Common
Stock. The Company may issue Common Stock, option rights or securities having
conversion or option rights without first offering them to the holders of the
Common Stock. Upon consummation of the Offering, all the outstanding shares of
Class A Common Stock and Class B Common Stock will be legally issued, fully paid
and nonassessable.
PREFERRED STOCK
The Board is authorized, without further action by the shareholders of the
Company and with the full authority permitted by law, to issue the Preferred
Stock from time to time in one or more classes or series and to determine the
voting rights, designations, preferences, limitations, qualifications,
privileges, options, restrictions and special rights, if any, including, without
limitation, the dividend rights, conversion rights, voting rights, redemption
rights and maturity dates thereof. The Preferred Stock is available for possible
future financing and acquisition transactions, stock dividends or distributions,
employee benefit plans and other general corporate purposes. Under certain
circumstances, the Preferred Stock could be used to create voting impediments or
to frustrate persons seeking to effect a takeover, assume control of the Board
or otherwise gain control of the Company.
CERTAIN PROVISIONS OF THE ARTICLES AND BY-LAWS
CHANGE OF CONTROL PROVISIONS. Certain provisions of the Articles and
By-Laws may have the effect of delaying, deferring or preventing a change of
control of the Company that would be operative with respect to an extraordinary
corporate transaction involving the Company, such as a merger, reorganization,
tender offer, sale or transfer of substantially all of its assets or
liquidation. These provisions might discourage a potentially
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interested purchaser from attempting a unilateral takeover bid for the Company
on terms which some shareholders might favor. Although the Company does not
believe that, by discouraging potential takeover bids, these provisions will
depress the stock price of the Common Stock, these provisions might diminish the
opportunity for the shareholders of the Company to sell their shares at a
premium over then prevailing market prices. Set forth below is a discussion of
such provisions.
Advance Notice of Business to be Brought Before Shareholder
Meetings. Except as otherwise provided with respect to the nomination of
directors, the By-Laws restrict the ability of a shareholder other than
Kennametal to bring business before an annual or special meeting of
shareholders. Specifically, to do so, such shareholder must provide written
notice of the proposed business to the Secretary of the Company at least 60 days
in advance of such annual or special meeting (or if less than 60 days' notice or
prior public disclosure of the date of such annual or special meeting is given,
not later than 10 days after the date of mailing of such notice or the date of
such public disclosure, whichever occurs first). Such shareholder notice is
required to set forth the following information: (i) the name and address of the
shareholder proposing such business; (ii) a brief description of such business;
(iii) the class, series and number of shares of the Company's capital stock
owned by such shareholder; (iv) a description of all arrangements or
understandings between such shareholder and any other person or persons (naming
such person or persons) in connection with such business or any special interest
such shareholder may have in connection with such business; (v) all other
information as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Commission had proxies been solicited with
respect to such business by the Board; and (vi) a representation that the
shareholder is a shareholder of record of stock of the Company entitled to vote
at such meeting and intends to appear in person or by proxy in order to present
such proposal.
The foregoing provisions may delay the ability of shareholders to bring
matters before annual or special meetings of the shareholders other than matters
which the Company deems desirable and may provide sufficient time for the
Company to institute litigation or take other appropriate steps to respond to
such business or to prevent such business from being acted upon, if such
response or prevention is thought to be necessary or desirable for any reason.
The foregoing provisions do not limit a shareholder's right to provide a
proposal for inclusion in the proxy statement of the Company in accordance with
Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
Special Shareholder Meetings. Separately, the PBCL provides that unless
specifically permitted in the corporation's articles, shareholders of a
registered corporation are not entitled to call a special meeting of
shareholders. The Articles only permit Kennametal and its affiliates prior to
the Control Termination Date to call a special meeting.
Advance Notice of Nominees for the Board. The By-Laws restrict the ability
of a shareholder other than Kennametal to nominate individuals for election as
directors. Specifically, in order for such shareholder to make such
nomination(s), such shareholder must provide written notice of such
shareholder's intent to make such nomination(s) to the Secretary of the Company
at least 60 days in advance of the meeting of the shareholders at which such
election is to be held (or if less than 60 days' notice or prior public
disclosure of the date of such annual meeting is given, not later than 10 days
after the date of mailing of such notice or the date of such public disclosure,
whichever occurs first). Such shareholder notice is required to set forth the
following information: (i) the name and address of the shareholder who intends
to make the nomination(s) and of the person(s) to be nominated; (ii) the class,
series and number of shares of the Company's capital stock owned by such
shareholder and a representation that the shareholder is a holder of record of
such stock of the Company and intends to appear in person or by proxy at the
meeting to nominate the person(s) specified in the notice; (iii) a description
of all arrangements or understandings between such shareholder and any other
person(s), naming such person(s), pursuant to which the nomination or
nominations are to be made by the shareholder; (iv) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Commission had the nominee been nominated by the Board; and (v) the consent of
each nominee to serve as a director of the Company if so elected.
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The foregoing provisions provide the Company sufficient time to assess the
qualifications of any person proposed for election to the Board and provide
sufficient time for the Company to institute litigation or take other
appropriate steps to prevent the nominee from being elected or serving, if such
prevention is thought to be necessary or desirable for any reason. Such
provisions also may inhibit shareholders who do not have any intention of
controlling the Company or the Board from participating in the nomination
process.
Removal of Directors. The Articles provide that prior to the Control
Termination Date, the entire Board of Directors, any class of directors or any
individual director may be removed from office, without cause by a vote of the
shareholders or of the holders of a class or series of shares entitled to elect
such directors or director. On or after the Control Termination Date, directors
may be removed from office by a vote of the shareholders or of the holders of a
class or series of shares entitled to elect such directors or director only for
"Cause," which is defined as (i) a judicial declaration of unsound mind, (ii)
conviction of an offense punishable by imprisonment for a term of more than one
year, (iii) breach of failure to perform statutory duties which constitute self
dealing, willful misconduct or recklessness, or (iv) failure to accept election
as a director within 180 days following notice of such election.
Limitation Of Liability. The Articles provides that, to the fullest extent
permitted by law, directors of the Company will not be personally liable for
monetary damages for any action taken, or any failure to take any action, as a
director.
PBCL Anti-Takeover Provisions. The PBCL contains a number of statutory
"anti-takeover" provisions, including Subchapters E, F, G and H of Chapter 25
and Section 2538 of the PBCL, which apply automatically to a Pennsylvania
registered corporation (usually a public company) unless such corporation elects
to opt-out as provided in such provisions. The Company, as a new Pennsylvania
registered corporation, has elected in its Articles to opt-out of certain of the
anti-takeover provisions entirely, namely Subchapters E and G (and the related
Subchapters I and J as discussed below) and Subchapters F and H, and has elected
in its Articles to exclude Kennametal and its affiliates from Section 2538
(which applies to transactions with interested shareholders). Upon completion of
the Offering, Kennametal will beneficially own approximately 98.0% of the
combined voting power of all classes of voting stock of the Company (97.6% if
the Underwriters' over-allotment option is exercised). The Company believes that
certain of the PBCL "anti-takeover" provisions are less necessary as a result of
such ownership structure and elimination of such provisions alleviates their
being inadvertently triggered by virtue of the Company's ownership structure,
contrary to the intentions of such provisions.
The following descriptions are qualified in their entirety by reference to
such provisions of the PBCL:
Subchapter E (relating to control transactions) generally provides
that if any person or group acquires 20% or more of the voting power of a
covered corporation, the remaining shareholders may demand from such person
or group the fair value of their shares, including a proportionate amount
of any control premium.
Subchapter F (relating to business combinations) generally delays for
five years and imposes conditions upon "business combinations" between an
"interested shareholder" and the corporation. The term "business
combination" is defined broadly to include various transactions between a
corporation and an interested shareholder including mergers, sales or
leases of specified amounts of assets, liquidations, reclassifications and
issuances of specified amounts of additional shares of stock of the
corporation. An "interested shareholder" is defined generally as the
beneficial owner of at least 20% of a corporation's voting shares.
Subchapter G (relating to control-share acquisitions) generally
prevents a person or group who has acquired 20% or more of the voting power
of a covered corporation from voting such shares unless the "disinterested"
shareholders approve such voting rights. Failure to obtain such approval
exposes the owner to the risk of a forced sale of the shares to the issuer.
If shareholder approval is obtained, the corporation is also subject to
Subchapters I and J of Chapter 25 of the PBCL. Subchapter I provides for a
minimum severance payment to certain employees terminated within two years
of the approval. Subchapter J prohibits the abrogation of certain labor
contracts prior to their stated date of expiration.
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Subchapter H (relating to disgorgement) generally applies in the event
that any person or group publicly discloses that the person or group may
acquire control of the corporation or a person or the group acquires (or
publicly discloses an offer or intent to acquire) 20% or more of the voting
power of the corporation and, in either case, sells shares within 18 months
thereafter. Any profits from sales of equity securities of the corporation
by the person or the group during the 18-month period belong to the
corporation if the securities that were sold were acquired during the
18-month period or within the preceding 24 months.
Section 2538 of the PBCL generally establishes certain shareholder
approval requirements with respect to specified transactions with
"interested shareholders."
Also, Subchapters E, F, G and H contain a wide variety of
transactional and status exemptions, exclusions and safe harbors.
LIMITATIONS ON THE COMPANY'S BUSINESS ACTIVITIES. The Articles provide
that, at any time prior to the day after the third annual meeting of
shareholders held after the Control Termination Date, the Company will not,
directly or indirectly (whether through a subsidiary of, or any other person
controlled by, the Company), for its own account or for the account of another,
engage in manufacturing metalworking tools, inserts or related products,
including, but not limited to, cutting tools, carbide and other tool inserts,
abrasives, drills, machine tool accessories, hand tools and other industrial
supplies (collectively, the "Metalworking Products").
The Articles also provide that, at any time prior to the day after the
third annual meeting of shareholders held after the Control Termination Date,
the Company will not, directly or indirectly (whether through a subsidiary of,
or any other person controlled by, the Company), engage in any business or
activity other than the Industrial Supply Business without the consent of
Kennametal or a majority vote of the Company's shareholders and that no person
will be liable for breach of any fiduciary duty as a shareholder or controlling
person of the Company, or otherwise, by reason of such person consenting to or
voting in favor of, or not consenting to or voting against authorization for the
Company to engage in any business or activity other than the Industrial Supply
Business.
The Articles also require that, at any time prior to the day after the
third annual meeting of shareholders held after the Control Termination Date,
unless Kennametal otherwise consents, the Company shall purchase from Kennametal
or its affiliates all of the Company's direct-marketing requirements for
Metalworking Products available from Kennametal or its affiliates.
After the Control Termination Date and before the day after the third
annual meeting of shareholders held after the Control Termination Date, this
provision may be amended, altered or repealed only by the unanimous vote of all
shareholders entitled to vote thereon.
CORPORATE OPPORTUNITIES. The Articles provide that, at any time prior to
the day after the third annual meeting of shareholders held after the Control
Termination Date, no opportunity, transaction, agreement or other arrangement to
which Kennametal or its affiliates is a party shall be a corporate opportunity
of the Company, directly or indirectly (whether through a subsidiary of, or any
other person controlled by, the Company), unless such opportunity, transaction,
agreement or other arrangement was initially offered to the Company or its
subsidiaries before it is offered to Kennametal and either: (i) the Company or
its subsidiaries has an enforceable contractual interest in such opportunity,
transaction, agreement or arrangement or (ii) the subject matter of such
opportunity, transaction, agreement or other arrangement is a constituent
element of an activity in which the Company or its subsidiaries is then actively
engaged. Even if the foregoing conditions were met, the Articles provide that
such fact alone does not conclusively render such opportunity the property of
the Company. After the Control Termination Date and before the day after the
third annual meeting of shareholders held after the Control Termination Date,
this provision may be amended, altered or repealed only by the unanimous vote of
all shareholders entitled to vote thereon.
Kennametal may in the future receive business opportunities which would be
suitable for either the Company or Kennametal (or an affiliate of Kennametal
other than the Company). There can be no assurance that such business
opportunities will be offered to the Company.
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NEW YORK STOCK EXCHANGE LISTING
Prior to the date of this Prospectus, there has been no established public
market for the Common Stock. The Class A Common Stock has been approved for
listing on the New York Stock Exchange under the symbol "JLK."
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. will serve as the Transfer Agent
and Registrar for the Class A Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 4,257,000 shares
of Class A Common Stock issued and outstanding (4,897,000 if the Underwriters'
over-allotment option is exercised in full) and 20,897,000 shares of Class B
Common Stock issued and outstanding (20,257,000 if the Underwriter's over-
allotment option is exercised in full). All of the shares of Class A Common
Stock to be sold in the Offering will be freely transferable and tradable
without restrictions under the Securities Act, except for any shares purchased
by an "affiliate" of the Company (as that term is defined in Rule 144 adopted
under the Securities Act ("Rule 144")), which will be subject to the resale
limitations of Rule 144. All of the outstanding shares of Class B Common Stock
are owned by Kennametal and have not been registered under the Securities Act
and may not be sold in the absence of an effective registration statement under
the Securities Act other than in accordance with Rule 144 or another exemption
from registration. Kennametal has certain rights to require the Company to
effect registration of shares of Common Stock owned by Kennametal, which rights
may be assigned. See "Relationship with Kennametal--Corporate Agreement."
In general, under Rule 144 as currently in effect, a person (including an
affiliate) who beneficially owns shares that are "restricted securities" as to
which at least one year has elapsed since the later of the date of acquisition
of such securities from the issuer or from an affiliate of the issuer, and any
affiliate who owns shares that are not "restricted securities", is entitled to
sell within any three-month period, a number of shares that does not exceed
(together with the sales by other persons required to be aggregated) the greater
of one percent of the total number of outstanding shares of the class of stock
being sold or the average weekly reported trading volume of the class of stock
being sold during the four calendar weeks preceding the filing of the required
notice of such sale. A person (or persons whose shares are aggregated) who is
not deemed an "affiliate" of the Company and who has beneficially owned
restricted securities as to which at least two years have elapsed since the
later of the date of the acquisition of such securities from the issuer or from
an affiliate of the issuer is entitled to sell such shares without regard to the
volume limitations described above. As defined in Rule 144, an "affiliate" of an
issuer is a person that directly or indirectly through the use of one or more
intermediaries controls, is controlled by, or is under common control with, such
issuer.
Prior to the Offering, there has been no public market for the Common
Stock. No predictions can be made as to the effect, if any, that future sales of
Common Stock or the availability of such shares for sale will have on the
prevailing market prices of the Class A Common Stock following the Offering.
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales could occur, could adversely affect prevailing market
prices for Class A Common Stock. Although Kennametal in the future may effect or
direct sales or other dispositions of Common Stock that would reduce its
beneficial ownership interest in the Company, Kennametal has advised the Company
that its current intention is to continue to hold all of the Class B Common
Stock beneficially owned by it immediately after the completion of the Offering.
However, Kennametal has no agreement with the Company not to sell or distribute
such shares and, other than pursuant to the Purchase Agreement described below,
there can be no assurance concerning the period of time during which Kennametal
will maintain its beneficial ownership of Common Stock. Beneficial ownership of
at least 80% of the total voting power and value of the outstanding Common Stock
is required in order for Kennametal to continue to include the Company in its
consolidated group for federal tax purposes and ownership of at least 80% of the
total voting power and 80% of each class of nonvoting capital stock is required
in order for Kennametal to be able to effect a Tax-Free Spin-Off of the Company.
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Kennametal has indicated to the Company that any decision by Kennametal to
reduce such beneficial ownership interest would be made in the future on the
basis of all of the circumstances existing at such time, including the effect,
if any, of any such reduction on Kennametal, stock market conditions and other
factors. The Company and Kennametal have agreed not to (i) directly or
indirectly, offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Class A
Common Stock or any securities convertible into or exercisable or exchangeable
for Class A Common Stock (including Class B Common Stock) or file any
registration statement under the Securities Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Class A Common Stock or any securities
convertible into or exercisable or exchangeable for Class A Common Stock
(including Class B Common Stock) whether any such swap or transaction described
in clause (i) or (ii) above is to be settled by delivery of Class A Common Stock
or such other securities, in cash or otherwise, for a period of 180 days from
the date of this Prospectus without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated on behalf of the Underwriters, except for
any shares of Class A Common Stock issued or options to purchase Class A Common
Stock granted pursuant to the Company's employee benefit plans described herein.
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UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company and each of the underwriters named below
(the "Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Goldman, Sachs & Co. are acting as representatives (the
"Representatives") the Company has agreed to sell to each of the Underwriters,
and each of the Underwriters has severally agreed to purchase from the Company,
the aggregate number of shares of Class A Common Stock set forth opposite its
name below. The Purchase Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Class A Common
Stock offered hereby if any of such shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
---------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
Goldman, Sachs & Co...................................................
---------
Total.................................................... 4,257,000
========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Class A Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a discount not
in excess of $ per share to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
The Company has granted the Underwriters an option exercisable for 30 days
from the date of this Prospectus to purchase up to an aggregate of 640,000
additional shares of Class A Common Stock at the public offering price set forth
on the cover page of this Prospectus, less the underwriting discount. The
Underwriters may exercise this option only to cover over-allotments, if any,
made on the sale of the shares of Class A Common Stock offered hereby. If the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof which the number of shares of Class A Common Stock to be
purchased by it shown in the foregoing table bears to the 4,257,000 shares of
Class A Common Stock initially offered hereby.
The Company and Kennametal have agreed not to (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Class A Common Stock
or any securities convertible into or exercisable or exchangeable for Class A
Common Stock (including Class B Common Stock) or file any registration statement
under the Securities Act with respect to any of the foregoing or (ii) enter into
any swap or any other agreement or any transaction that transfers, in whole or
in part, directly or indirectly, the economic consequence of ownership of the
Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock (including Class B Common Stock) whether
any such swap or transaction described in clause (i) or (ii) above is to be
settled by delivery of Class A Common Stock or such other securities, in cash or
otherwise, for a period of 180 days from the date of this Prospectus without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on
behalf of the Underwriters, except for any shares of Class A Common Stock issued
or options to purchase Class A Common Stock granted pursuant to the Company's
employee benefit plans described herein.
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The Company and Kennametal have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Class A Common Stock is completed, rules of
the Commission may limit the ability of the Underwriters and certain selling
group members to bid for and purchase the Class A Common Stock. As an exception
to these rules, the Underwriters are permitted to engage in certain transactions
that stabilize the price of the Class A Common Stock. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Class A Common Stock.
If the Underwriters create a short position in the Class A Common Stock in
connection with the Offering (i.e., if they sell more shares of Class A Common
Stock than are set forth on the cover page of the Prospectus), the Underwriters
may reduce that short position by purchasing Class A Common Stock in the open
market. The Underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Underwriters purchase shares of
Class A Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Class A Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A Common Stock. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Certain of the Underwriters have provided from time to time, and may
provide in the future, investment banking services to Kennametal, the Company
and their affiliates, for which such Underwriters have received and will receive
customary fees and commissions.
The Class A Common Stock has been approved for listing on the New York
Stock Exchange under the trading symbol "JLK." In order to meet the requirements
for listing the Class A Common Stock on the New York Stock Exchange, the
Underwriters have undertaken to sell lots of 100 or more shares of Class A
Common Stock to a minimum of 2,000 beneficial owners.
The Underwriters have reserved for sale, at the initial public offering
price, shares of the Class A Common Stock for certain employees and directors of
the Company and Kennametal and to certain outside parties, largely product
vendors of the Company, who have expressed an interest in purchasing such shares
of Class A Common Stock. Such employees, directors and other persons are
expected to purchase, in the aggregate, not more than 5% of the Class A Common
Stock offered in the Offering. The number of shares available for sale to the
general public in the Offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered to the general public on the same basis as other shares offered hereby.
Prior to the Offering, there has been no established trading market for the
shares of Class A Common Stock. The initial public offering price for the Class
A Common Stock offered hereby has been determined by negotiations between the
Company and the Underwriters. Among the factors considered in making such
determination were the history of and the prospects for the industry in which
the Company competes, an assessment of the Company's management, the past and
present operations of the Company, the historical results of operations of the
Company and the trend of its revenues and earnings, the prospects for future
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earnings of the Company, the general condition of the securities markets at the
time of the Offering, the prices of similar securities of generally comparable
companies and other relevant factors. There can be no assurance that an active
trading market will develop for the Class A Common Stock or that the Class A
Common Stock will trade in the public market subsequent to the Offering at or
above the initial public offering price.
The Underwriters have informed the Company that they do not intend to
confirm sales of Class A Common Stock offered hereby to any accounts over which
they exercise discretionary authority.
LEGAL MATTERS
The validity of the Class A Common Stock being offered hereby will be
passed upon for the Company by Buchanan Ingersoll Professional Corporation,
Pittsburgh, Pennsylvania. William R. Newlin, Chairman of the Board of the
Company and Kennametal, is a shareholder in Buchanan Ingersoll Professional
Corporation. As of April 28, 1997, Mr. Newlin beneficially owned 23,052 shares
of Kennametal Capital Stock and 8,322 Kennametal Stock Credits. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York. Simpson Thacher & Bartlett will rely on
Buchanan Ingersoll Professional Corporation with respect to matters of
Pennsylvania law.
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Class A Common Stock offered hereby. This Prospectus, which constitutes part of
the Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits and schedules thereto on file with the
Commission pursuant to the Securities Act and the rules and regulations of the
Commission thereunder. The Registration Statement, including exhibits and
schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's regional offices at Seven World
Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. In addition, the Registration Statement may
be accessed electronically at the Commission's site on the World Wide Web at
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
Prior to the Offering, the Company has not been required to file reports
under the Exchange Act. However, following the consummation of the Offering, the
Company will be required to file reports proxy statements and other information
with the Commission pursuant to the Exchange Act. Such reports, proxy statements
and other information can be inspected and copied at the addresses, and may be
accessed electronically at the web site, set forth above. The Company intends to
furnish to its shareholders annual reports containing audited financial
statements following the end of each fiscal year and to make available quarterly
reports containing unaudited summary financial information for the first three
fiscal quarters of each fiscal year. Kennametal is subject to the information
requirements of the Exchange Act and in accordance therewith files reports and
other information with the Commission.
67
<PAGE> 69
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Statements of Income..................................................... F-3
Consolidated Balance Sheets........................................................... F-4
Consolidated Statements of Cash Flows................................................. F-5
Consolidated Statements of Shareholder's Equity....................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 70
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO JLK DIRECT DISTRIBUTION INC.
We have audited the accompanying consolidated balance sheets of JLK Direct
Distribution Inc. as of June 30, 1995 and 1996, and the related consolidated
statements of income, shareholder's equity and cash flows for each of the three
years in the period ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of JLK Direct
Distribution Inc. and subsidiaries as of June 30, 1995 and 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
April 25, 1997 (except with respect
to the matters discussed in Note 12,
as to which the date is May 30, 1997)
F-2
<PAGE> 71
JLK DIRECT DISTRIBUTION INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
-------------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. $144,933 $188,202 $243,969 $175,989 $225,195
Cost of goods sold........................ 100,672 127,917 166,326 120,017 152,339
-------- -------- -------- -------- --------
Gross profit............................ 44,261 60,285 77,643 55,972 72,856
Operating expenses........................ 33,026 40,658 52,761 38,217 50,425
-------- -------- -------- -------- --------
Operating income........................ 11,235 19,627 24,882 17,755 22,431
Interest and other........................ -- -- -- -- --
-------- -------- -------- -------- --------
Income before income taxes................ 11,235 19,627 24,882 17,755 22,431
Provision for income taxes................ 4,522 7,799 9,819 7,019 8,812
-------- -------- -------- -------- --------
Net income.............................. $ 6,713 $ 11,828 $ 15,063 $ 10,736 $ 13,619
======== ======== ======== ======== ========
Unaudited data, as adjusted:
Pro forma net income per share............ $ 0.71 $ 0.64
======== ========
Pro forma weighted average shares
outstanding............................. 21,272 21,272
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 72
JLK DIRECT DISTRIBUTION INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1995 1996
------- -------- MARCH PRO FORMA
31, MARCH 31,
1997 1997
-------- (NOTE 12)
(UNAUDITED) -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and equivalents........................ $ 6,854 $ 690 $ 6,678 $ 6,678
Accounts receivable, less allowance for
doubtful accounts of $152, $175 and $185,
respectively............................. 20,268 32,520 39,697 39,697
Inventories................................. 44,388 59,302 61,659 61,659
Deferred income taxes....................... 1,948 2,838 3,094 3,094
------- -------- -------- --------
Total current assets..................... 73,458 95,350 111,128 111,128
------- -------- -------- --------
Property, plant and equipment:
Land and buildings.......................... 834 1,073 950 950
Machinery and equipment..................... 4,838 6,090 8,177 8,177
Less accumulated depreciation............... (2,596) (3,191) (3,926) (3,926)
------- -------- -------- --------
Net property, plant and equipment........ 3,076 3,972 5,201 5,201
------- -------- -------- --------
Other assets:
Goodwill, net............................... 21,628 20,990 20,512 20,512
Deferred income taxes....................... -- 79 226 226
Other....................................... 731 654 1,065 1,065
------- -------- -------- --------
Total other assets....................... 22,359 21,723 21,803 21,803
------- -------- -------- --------
TOTAL ASSETS............................. $98,893 $121,045 $138,132 $138,132
======= ======== ======== ========
LIABILITIES:
Current liabilities:
Accounts payable............................ $ 9,537 $ 13,519 $ 17,617 $ 17,617
Due to Kennametal and affiliates............ 7,853 4,861 3,476 3,476
Income taxes payable........................ 2,683 1,966 2,460 2,460
Accrued vacation pay........................ 640 777 830 830
Other....................................... 800 964 1,105 1,105
Dividends payable........................... -- -- -- 20,000
------- -------- -------- --------
Total current liabilities................ 21,513 22,087 25,488 45,488
------- -------- -------- --------
Deferred income taxes....................... 87 -- -- --
Other liabilities........................... 571 967 1,266 1,266
------- -------- -------- --------
Total liabilities........................ 22,171 23,054 26,754 46,754
------- -------- -------- --------
SHAREHOLDER'S EQUITY:
Investments by and advances from
Kennametal............................... 76,725 98,038 111,244 91,244
Translation adjustment...................... (3) (47) 134 134
------- -------- -------- --------
Total shareholder's equity............... 76,722 97,991 111,378 91,378
------- -------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY................................. $98,893 $121,045 $138,132 $138,132
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 73
JLK DIRECT DISTRIBUTION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
---------------------------- ------------------
1994 1995 1996 1996 1997
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................................... $6,713 $11,828 $15,063 $10,736 $13,619
Adjustments for noncash items:
Depreciation and amortization................. 1,240 1,278 1,458 1,073 1,118
Noncash transactions with Kennametal.......... 3,438 3,481 5,660 4,067 4,714
Changes in certain assets and liabilities:
Accounts receivable........................... (5,051) 2,100 (12,252) (9,554) (7,177)
Inventories................................... (1,612) (8,697) (14,914) (8,205) (2,357)
Accounts payable and accrued liabilities...... 3,058 6,815 1,278 (127) 2,907
Other......................................... 1,801 1,378 (1,287) (1,253) (21)
------ ------- ------- ------- -------
Net cash flow from (used in) operating
activities.................................... 9,587 18,183 (4,994) (3,263) 12,803
------ ------- ------- ------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (648) (1,175) (2,053) (1,408) (2,028)
Other........................................... 529 234 337 -- 159
------ ------- ------- ------- -------
Net cash flow used in investing activities...... (119) (941) (1,716) (1,408) (1,869)
------ ------- ------- ------- -------
FINANCING ACTIVITIES:
Net cash advances by (payments to) Kennametal... (7,159) (15,391) 590 (1,450) (5,127)
------ ------- ------- ------- -------
EXCHANGE RATE EFFECT ON CASH.................... -- (3) (44) 10 181
CASH AND EQUIVALENTS:
Net increase (decrease) in cash and
equivalents................................... 2,309 1,848 (6,164) (6,111) 5,988
Cash and equivalents, beginning of period....... 2,697 5,006 6,854 6,854 690
------ ------- ------- ------- -------
Cash and equivalents, end of period............. $5,006 $ 6,854 $ 690 $ 743 $ 6,678
====== ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Income taxes paid............................... $4,944 $ 7,575 $10,891 $ 8,168 $ 9,168
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 74
JLK DIRECT DISTRIBUTION INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1994 1995 1996
------- ------- ------- MARCH 31,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of period...................... $73,815 $76,807 $76,722 $ 97,991
Net income.......................................... 6,713 11,828 15,063 13,619
Net cash advances by (payments to) Kennametal....... (7,159) (15,391) 590 (5,127)
Other noncash transactions.......................... 3,438 3,481 5,660 4,714
Translation adjustment.............................. -- (3) (44) 181
------- ------- ------- --------
Balance at end of period............................ $76,807 $76,722 $97,991 $111,378
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 75
JLK DIRECT DISTRIBUTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND NATURE OF BUSINESS
The accompanying consolidated financial statements of JLK Direct
Distribution Inc. (the "Company") include the operations of J&L America, Inc.
("J&L"), a wholly owned subsidiary of Kennametal Inc. ("Kennametal"), and Full
Service Supply ("Full Service Supply"), which had been operated as a program of
Kennametal. Prior to April 1, 1997, the Company had no separate legal status or
existence. Kennametal incorporated the Company as a Pennsylvania corporation
under the name "JLK Direct Distribution Inc." in April 1997. In anticipation of
an initial public offering ("IPO"), (i) Kennametal contributed to the Company
the stock of J&L and the assets and liabilities of Full Service Supply and (ii)
the Company and Kennametal entered into certain contractual arrangements (see
Note 12). The Company and Kennametal will operate as separate companies.
The Company is a global distributor of metalworking consumables and related
products to the metalworking industry utilizing mail order catalogs, showrooms,
and integrated industrial supply programs, which constitutes a single business
segment. The Company's executive offices are located in Latrobe, Pennsylvania
and serve both domestic and international markets through its 18 showrooms and
six distribution centers and numerous integrated industrial supply programs,
with the largest concentration in the midwest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented below to assist
in evaluating the Company's financial statements.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
consist of the financial statements of the Company as described in Note 1. These
statements are presented as if the Company had existed as a corporation separate
from Kennametal and include the historical assets, liabilities, sales and
expenses directly related to the Company's operations that were either
specifically identifiable or allocable. Shareholder's equity (which represents
Kennametal's 100% interest prior to the IPO) comprises both investments by and
non-interest bearing advances from Kennametal. The Company expects that in
connection with the IPO, such amounts will be included as part of the Company's
permanent equity capitalization. All operating expenses related to the Company
have been appropriately reflected in the Company's consolidated financial
statements. All material transactions between entities included in the
consolidated financial statements have been eliminated. The accompanying
financial statements do not include Kennametal's general corporate debt or an
allocation of interest expense.
For the periods presented, certain operating expenses reflected in the
consolidated financial statements include charges for certain services provided
by Kennametal. These charges are based on personnel, business volume or other
appropriate bases and generally include expenses related to information
management and other administrative services. These charges are estimates based
on Kennametal management's best estimate of actual expenses. It is Kennametal
management's opinion that the expenses charged to the Company are reasonable and
are representative of the expenses the Company would have incurred on a
stand-alone basis.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND EQUIVALENTS. Cash as reflected in the consolidated financial
statements represents the Company's position in Kennametal's centralized cash
management system. Kennametal considers temporary cash investments having
original maturities of three months or less as cash equivalents. Cash
equivalents consist principally of investments in money market funds and
certificates of deposit.
INVENTORIES are carried at the lower of cost, using the first-in, first-out
(FIFO) method, or market.
F-7
<PAGE> 76
PROPERTY, PLANT AND EQUIPMENT are carried at cost. Major improvements are
capitalized, while maintenance and repairs are generally expensed as incurred.
Retirements and disposals are removed from cost and accumulated depreciation
accounts, with the gain or loss reflected in net income. Depreciation for
financial reporting purposes is computed using the straight-line method over the
estimated useful lives of the assets ranging from three to 10 years.
ADVERTISING AND CATALOG COSTS. Advertising costs are expensed as incurred.
The costs of producing and distributing the Company's catalog are deferred and
are included in other assets in the Company's balance sheet. These costs are
amortized over the life of the catalog which typically is one year or less.
PRE-OPENING COSTS related to showrooms, distribution centers and new
integrated supply contracts are expensed as incurred.
GOODWILL represents an allocation from Kennametal for the excess of costs
over the fair value of net assets acquired related to the historical acquisition
costs of the Company. Goodwill is being amortized on a straight-line basis over
the expected period to be benefited, which is estimated to be 40 years. The
Company assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation.
INCOME TAXES. The provision for Federal and state income taxes has been
calculated as if the Company were a stand-alone corporation filing separate tax
returns. Deferred income taxes are recognized based on the future income tax
effects (using enacted tax laws and rates) of differences in the carrying
amounts of assets and liabilities for financial reporting and tax purposes. A
valuation allowance is recognized if it is "more likely than not" that some or
all of a deferred tax asset will not be realized.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of the Company's
international operation are translated into U.S. dollars using year-end exchange
rates, while sales and expenses are translated at average exchange rates
throughout the year. The resulting net translation adjustments are recorded as a
separate component of shareholder's equity.
EARNINGS PER SHARE is computed using the weighted average number of shares
outstanding during the year.
REVENUE RECOGNITION. The Company recognizes revenue from product sales upon
transfer of title to the customer.
NEW ACCOUNTING STANDARDS. In March 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The Company adopted SFAS No. 121 on July 1, 1996 and
the adoption of SFAS No. 121 did not have an impact on the consolidated
financial statements, as the statement is consistent with existing Company
policy.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the provisions of SFAS No. 123, companies may elect to
account for stock-based compensation plans using a fair-value-based method or
may continue measuring compensation expense for those plans using the intrinsic-
value-based method. Companies electing to continue using the
intrinsic-value-based method must provide pro forma disclosures of net income
and earnings per share as if the fair-value-based method had been applied.
Management intends to account for stock-based compensation using the
intrinsic-value-based method and, as such, SFAS No. 123 will not have an impact
on the Company's results of operations or financial position. The required
disclosure will be provided in the Company's fiscal 1997 consolidated financial
statements.
The FASB also recently issued SFAS No. 128, "Earnings Per Share" and SFAS
No. 129, "Disclosure of Information about Capital Structures." SFAS No. 128 was
issued in February 1997 and is effective for periods ending after December 15,
1997. This statement, upon adoption, will require all prior period earnings per
share ("EPS") data to be restated to conform to the provisions of the statement.
This statement's objective is to simplify the computations of EPS and to make
the U.S. standard for EPS computations more compatible with that of the
International Accounting Standards Committee. The Company will adopt SFAS No.
128 in fiscal 1998 and does not anticipate that the statement will have a
significant impact on its reported EPS.
F-8
<PAGE> 77
SFAS No. 129 was issued in February 1997 and is effective for periods
ending after December 15, 1997. This statement, upon adoption, will require all
companies to provide specific disclosure regarding their capital structure. SFAS
No. 129 will specify the disclosure for all companies, including descriptions of
their capital structure and the contractual rights of the holders of such
securities. The Company will adopt SFAS No. 129 in fiscal 1998 and does not
anticipate that the statement will have a significant impact on its disclosure.
INTERIM UNAUDITED FINANCIAL INFORMATION. The consolidated financial
statements as of, and for the nine months ended March 31, 1997 and 1996 are
unaudited; however, in the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of the
unaudited consolidated financial statements for these interim periods have been
included. The results of interim periods are not necessarily indicative of the
results to be obtained for a full year.
3. GOODWILL
Goodwill is comprised of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Goodwill....................................................... $25,167 $25,167
Less: Accumulated amortization................................. 3,539 4,177
------- -------
$21,628 $20,990
======= =======
</TABLE>
4. LEASES
The operations of the Company are conducted on leased premises, primarily
leased from related parties. The leases (most of which provide for the payment
of real estate taxes, insurance and other operating costs) are for varying
periods, the longest extending to the year 2005. At June 30, 1996, approximate
minimum annual rentals on such leases are as follows:
<TABLE>
<CAPTION>
TOTAL
(INCLUDING
RELATED RELATED
PARTY PARTY
COMMITMENTS) COMMITMENTS
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
1997...................................... $2,534 $1,199
1998...................................... 2,603 1,201
1999...................................... 2,360 1,188
2000...................................... 1,907 1,181
2001...................................... 1,133 788
2002 and thereafter....................... 342 11
</TABLE>
Total rental expense (exclusive of real estate taxes, insurance and other
operating costs) for all operating leases for the fiscal years ended June 30,
1994, 1995, and 1996 was approximately $1.8 million, $1.8 million and $2.3
million, respectively, including approximately $0.8 million, $0.8 million, and
$1.1 million, respectively, paid to related parties. In the opinion of the
Company's management, these leases with affiliates are on terms which
approximate fair market value.
5. COMMITMENTS AND CONTINGENCIES
The Company has available a credit facility with a bank aggregating $2.0
million, with interest payable at the prevailing prime interest rate. The credit
facility may be terminated at the option of the bank or the Company. At June 30,
1996 and for the nine months ended March 31, 1997, no amounts were outstanding
under the credit facility.
F-9
<PAGE> 78
6. INCOME TAXES
Effective July 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 utilizes an asset and liability approach and
deferred taxes are determined based on the estimated future tax effects of
differences between the financial statements and tax bases of assets and
liabilities given the provisions of enacted tax laws. The adoption of SFAS No.
109 did not have a material impact on the consolidated financial statements.
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income taxes:
Federal........................................................ $4,297 $6,559 $9,454
State.......................................................... 646 987 1,421
------ ------ ------
Total.......................................................... 4,943 7,546 10,875
Deferred income taxes............................................ (421) 253 (1,056)
------ ------ ------
Provision for income taxes....................................... $4,522 $7,799 $9,819
====== ====== ======
Effective tax rate............................................... 40.2% 39.7% 39.5%
====== ====== ======
</TABLE>
The reconciliation of income taxes computed using the statutory U.S. income
tax rate and the provision for income taxes was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at U.S. statutory rate.............................. $3,932 $6,869 $8,709
State income taxes, net of federal tax benefits.................. 386 660 835
Nondeductible goodwill........................................... 223 223 223
Other............................................................ (19) 47 52
------ ------ ------
Provision for income taxes....................................... $4,522 $7,799 $9,819
====== ====== ======
</TABLE>
Deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets (liabilities):
Inventory valuation and reserves.......................................... $1,742 $2,589
Accrued vacation and workers compensation............................... 161 172
Property, plant and equipment........................................... (306) (291)
Postretirement benefits................................................. 87 120
Pension benefits........................................................ 131 250
Other................................................................... 46 77
------ ------
Net deferred tax assets................................................... $1,861 $2,917
====== ======
</TABLE>
7. PENSION BENEFITS
The Company participates in Kennametal's Retirement Income Plan (the
"Plan") which covers substantially all of the Company's employees. The benefits
provided by the Plan are measured by length of service, compensation and other
factors and are funded by a trust established under the Plan. The Kennametal
Plan is currently overfunded and complies with the funding requirements of
ERISA. Plan assets consist principally of common stocks, corporate bonds and
U.S. government securities.
The following table provides the details of the components of pension
expense for the Company. It is not practicable to determine the funded status of
the portion of the Plan which relates to the Company. On an overall basis, the
funded assets of the Plan were in excess of the projected benefit obligation as
of June 30, 1995 and 1996.
F-10
<PAGE> 79
The components of net pension cost for the Company's portion of the Plan
were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost......................................................... $420 $515 $601
Interest cost........................................................ 366 275 332
Return on plan assets................................................ (529) (422) (551)
Net amortization and deferral........................................ (48) (57) (88)
---- ---- ----
Net pension cost..................................................... $209 $311 $294
==== ==== ====
</TABLE>
The Company also participates in Kennametal's 401(k) Thrift Plan for
employees. The charge to operations incurred by the Company for contributions
totaled $.2 million, $.3 million and $.4 million in fiscal 1994, 1995 and 1996,
respectively.
8. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company participates in Kennametal's sponsored plan whereby certain
health care and life insurance benefits are provided for retired employees.
Substantially all employees may become eligible for these benefits if they reach
normal retirement age while working for the Company. These benefits are
currently unfunded.
Effective July 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Under the standard,
the expected cost of providing such benefits must be accrued during the periods
in which employees render the necessary service. The Company previously expensed
these costs as incurred. The adoption of SFAS No. 106 did not have a material
impact on the consolidated financial statements.
The components of other postretirement benefit costs for the Company's plan
were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost......................................................... $52 $56 $66
Interest cost........................................................ 9 13 19
---- ---- ----
Postretirement benefit costs......................................... $61 $69 $85
==== ==== ====
</TABLE>
In 1995, the Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." Under this standard, employers must accrue the cost of
separation and other benefits provided to former or inactive employees after
employment but before retirement. The Company's previous practice was to
generally accrue these costs as they arose. The adoption of this standard did
not have a material impact on the consolidated financial statements.
Postemployment benefit costs were not significant in 1995 and 1996.
9. FINANCIAL INSTRUMENTS
FAIR VALUE
The Company had $0.7 million in cash and equivalents at June 30, 1996,
which approximates fair value because of the short maturity of these
investments.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. By policy, the Company makes temporary cash investments
with high credit quality financial institutions. With respect to trade
receivables, concentrations of credit risk are somewhat reduced because the
Company serves numerous customers in many industries and geographic areas. As of
June 30, 1995 and 1996, receivables with the Company's five largest accounts
represented 22% and 35%, respectively, of total accounts receivables (see Note
12).
F-11
<PAGE> 80
10. SIGNIFICANT CUSTOMERS
The Company operates predominantly in one industry segment, that being
distribution of metalworking consumables and related products to the
metalworking industry utilizing mail order catalogs, showrooms, and integrated
industrial supply programs. During fiscal 1994, 1995, and 1996, sales to one
customer amounted to 24%, 22% and 21% of total sales, respectively (see Note
12). Sales outside of the United States were approximately $1.8 million and $5.1
million during fiscal 1995 and 1996, respectively. These sales were principally
to customers in the United Kingdom.
11. RELATED PARTY TRANSACTIONS
The Company engages in business transactions with Kennametal and its
subsidiaries. Products purchased for resale from Kennametal and its subsidiaries
totaled $8.0 million in 1994, $11.4 million in 1995 and $18.0 million in 1996.
Sales to these entities totaled $8.5 million in 1994, $11.4 million in 1995 and
$11.4 million in 1996.
The Company receives from Kennametal certain warehouse, management
information systems, financial and administrative services. All amounts incurred
by Kennametal on behalf of the Company are reflected in operating expenses in
the accompanying statements of income. In addition, costs charged to the Company
by Kennametal, totaling $3.4 million in 1994, $3.5 million in 1995 and $5.7
million in 1996 are included in the accompanying statements of income.
Kennametal intends to continue to provide services to the Company in the future
in accordance with the terms of the intercompany agreements described in Note
12. The amounts to be charged pursuant to these intercompany agreements will
reflect the actual costs of providing these services which will include the
additional costs associated with operating as a public company. However, the
increase in these charges is not expected to be material in the future.
Subsequent to the pending IPO discussed in Note 12, the Company will remit cash
to Kennametal in payment of such operating expense allocations.
12. SUBSEQUENT EVENTS
REORGANIZATION
The Company was incorporated in April 1997. The authorized capital stock of
the Company consists of 75,000,000 shares of Class A Common Stock ("Class A
Common Stock"), par value $.01 per share, 50,000,000 shares of Class B Common
Stock ("Class B Common Stock"), par value $.01 per share, and 25,000,000 shares
of Preferred Stock, par value $.01 per share. The holders of Class A Common
Stock and Class B Common Stock generally have identical rights except that
holders of Class A Common Stock are entitled to one vote per share, while
holders of Class B Common Stock are entitled to ten votes per share on all
matters to be voted on by the Company's shareholders.
Immediately prior to the effective date of the pending IPO described below,
Kennametal will exchange its currently outstanding investment for 20,897,000
shares of Class B Common Stock. Investments by and advances from Kennametal in
the pro forma March 31, 1997 Consolidated Balance Sheet has been reduced to
reflect the dividend of $20.0 million as discussed in the pro forma information
below.
COMMON STOCK OFFERING
In April 1997, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission
("SEC") with respect to an IPO of up to 20% of the Company's Class A Common
Stock (the "Offering"). If the Offering is consummated under the terms presently
anticipated, 4,257,000 shares of Class A Common Stock (4,897,000 inclusive of an
over-allotment option granted to the Company's Underwriters) will be issued. If
the Underwriters' over-allotment option is exercised, Kennametal has agreed to
surrender to the Company a number of its shares of Class B Common Stock which
equals the number of additional shares of Class A Common Stock purchased by the
Underwriters from the Company and, therefore, Kennametal will have 20,257,000
shares of Class B Common Stock if the over-allotment option is exercised in
full.
F-12
<PAGE> 81
The net proceeds from the Offering, after deducting estimated underwriting
discounts and expenses, are estimated to be approximately $66.1 million (or
approximately $76.2 million if the Underwriters' over-allotment option is
exercised in full) and will be used: (i) to repay $20.0 million of indebtedness
related to a dividend paid to Kennametal on April 28, 1997, (ii) to repay
amounts due to Kennametal totaling approximately $19.0 million, of which
approximately $14 million relates to acquisitions, $3 million relates to income
taxes and $2 million relates to employee benefit obligations, (iii) to spend $15
to $20 million to acquire or construct a new Midwest distribution center in the
Detroit, Michigan metropolitan area, which is expected to be approximately
200,000 to 250,000 square feet in size and should be in operation by June 30,
1999, (iv) to provide working capital for new showrooms and Full Service Supply
Programs and (v) to fund acquisitions. Pending such uses, the net proceeds will
be loaned to Kennametal in exchange for a note bearing interest at a fluctuating
rate equal to Kennametal's short term borrowing costs which provides for the
repayment of amounts due thereunder upon demand by the Company. Kennametal's
short term borrowing rate during April 1997 was approximately 5.8%. Kennametal
will maintain unused lines of credit to enable it to repay any portion or all of
such loans upon demand by the Company.
In anticipation of the Offering, the Company and Kennametal have entered
into a number of agreements, which will become effective upon completion of the
Offering, for the purpose of defining certain relationships between them. As a
result of Kennametal's ownership interest in the Company, the terms of such
agreements were not, and the terms of any future amendments to those agreements
may not be, the result of arm's length negotiations. Management believes that
the fees to be charged by Kennametal are reasonable and such fees are
representative of the expenses that the Company would incur on a stand alone
basis. The agreements primarily have initial terms of ten years. The following
summaries of these agreements are qualified in all material respects by the
terms and conditions of such agreements.
Administrative Services Agreement
The Company and Kennametal will enter into an intercompany administrative
services agreement with respect to services to be provided by Kennametal to the
Company. The administrative services agreement provides that such services will
be provided in exchange for fees which, generally, (i) in the case of services
purchased by Kennametal from third parties for the Company, will be based upon
the incremental cost charged by such third parties to Kennametal for such
services provided to the Company and (ii) in the case of services directly
provided by Kennametal, will be based on the estimated costs, including a
reasonable allocation of direct and indirect overhead costs, incurred by
Kennametal for the services it provides directly to the Company. The services
initially to be provided by Kennametal to the Company include, among other
things, certain treasury, general accounting and administrative services
including, tax, risk management, human resources, legal, internal audit,
marketing, executive time and space, and information systems services. The
administrative services agreement also provides that Kennametal will arrange and
administer all existing insurance arrangements and may continue coverage of the
Company under Kennametal's insurance policies and will allow eligible employees
of the Company to participate in all of Kennametal's benefit plans.
Lease Agreement
The Company and Kennametal will enter into a lease agreement pursuant to
which Kennametal will lease to the Company space within buildings located on
Kennametal's premises.
Shared Facilities Agreements
The Company and Kennametal will enter into shared facilities agreements
pursuant to which each company will sublease to the other company the facilities
which are leased by either of the companies and shared with the other company.
The shared facilities agreements provide that the relevant sublessor will lease
space to the sublessee at a rental rate equal to a pro rata share (based on
square feet occupied) of all costs and expenses (principally fixed rent) under
the relevant lease. The Company's management believes that the rental rates
payable by the Company are commensurate with market rates.
F-13
<PAGE> 82
Product Supply Agreement
The Company and Kennametal will enter into a product supply agreement
pursuant to which Kennametal agrees to supply and the Company agrees to purchase
from Kennametal all of the Company's requirements for metalworking consumables
and related products direct-marketed by the Company, and Kennametal further
agrees to supply all metalworking consumables and related products requested
pursuant to Full Service Supply programs, except as otherwise agreed from time
to time between the Company and Kennametal. The Company will be entitled to
purchase products for its direct-marketing business at prices discounted from
Kennametal's published price for each such product depending upon the volume of
each such product purchased by the Company.
Tax-Sharing Agreement
Pursuant to the tax-sharing agreement, the Company will make payments to
Kennametal determined as though the Company were to file separate federal, state
and local income tax returns.
Trademark License Agreement
The Company and Kennametal will enter into a trademark license agreement
which provides, among other things, for the grant to the Company by Kennametal
of a non-exclusive license to use Kennametal trademarks in connection with the
Company's business. The Company has also granted to Kennametal a non-exclusive
license to use the Company's trademarks and tradenames on terms similar to those
granted by Kennametal to the Company.
Indemnification Agreement
Under the indemnification agreement, subject to limited exceptions, the
Company is required to indemnify Kennametal and its directors, officers,
employees, agents and representatives for liabilities under federal or state
securities laws as a result of the Offering, including liabilities arising out
of or based upon alleged misrepresentations in or omissions from the
Registration Statement, of which this Prospectus is a part. The indemnification
agreement also provides that each party thereto (the "Indemnifying Party") will
indemnify the other party thereto and its directors, officers, employees, agents
and representatives (the "Indemnified Party") for liabilities that may be
incurred by the Indemnified Party relating to, resulting from or arising out of:
(i) the businesses and operations conducted or formerly conducted, or assets
owned or formerly owned, by the Indemnifying Party and its subsidiaries (except,
in the case where Kennametal is the Indemnifying Party, such businesses,
operations and assets of the Company and its subsidiaries); or (ii) the failure
by the Indemnifying Party to comply with any other agreements executed in
connection with the Offering, except to the extent caused by the Indemnified
Party. The indemnification agreement also provides that the Company will
indemnify Kennametal for any liabilities incurred under guarantees of leases.
Non-Competition and Corporate Opportunities Allocation Agreement
Pursuant to a non-competition and corporate opportunities allocation
agreement (the "Corporate Opportunities Agreement") to be entered into between
Kennametal and the Company: (i) Kennametal agrees for as long as the other
intercompany agreements remain in effect (whose current term is 10 years) (A)
not to compete with the Company in the business of direct marketing of a broad
range of metalworking consumables and related products through catalogs, monthly
promotional flyers, additional mailings and advertisements, telemarketing
efforts, direct-sales efforts and showrooms targeted at small and medium-sized
metalworking shops as well as the supply of consumable tooling and related
metalworking products at designated manufacturing plants of large industrial
customers through integrated supply programs, (the "Base Business") except where
the Company has been offered by Kennametal or its affiliates or a third party,
the right to acquire a business which falls under the Base Business at fair
market value, and the Company's Board of Directors has determined, for whatever
reason, that the Company shall not acquire such business, and (B) not to sell,
offer to sell, distribute or otherwise make available Kennametal manufactured
and branded products to anyone who intends to direct market such products and
therefore competes with the Company's
F-14
<PAGE> 83
direct-marketing program except, with respect to those contracts, arrangements
or relationships in existence on the date of the Corporate Opportunities
Agreement or with the prior written consent of the Company; and (ii) the Company
agrees for as long as the other intercompany agreements remain in effect not to
sell, offer to sell, distribute or otherwise make available any products which
compete directly or indirectly with Kennametal without the prior written consent
of Kennametal, except in connection with the provision of integrated industrial
supply programs as may be required specifically by customers thereof.
Intercompany Debt/Investment and Cash Management Agreement
The Company and Kennametal will enter into an Intercompany Debt/Investment
and Cash Management Agreement (the "Cash Management Agreement") under which the
Company will continue to participate in Kennametal's centralized cash management
system. The Cash Management Agreement provides for a daily transfer from the
Company's cash accounts to Kennametal's centralized cash accounts and daily
funding of the disbursements of the Company from such Kennametal cash account.
The Company will receive interest on net cash flows to Kennametal's centralized
cash accounts and be charged interest on net borrowings from the Kennametal
centralized cash accounts at a rate equal to the all-in interest rate available
to Kennametal from outside sources for short-term borrowings or investments,
depending upon the overall position of the centralized cash accounts. The
Company will pay for this service pursuant to the Administrative Services
Agreement and will reimburse Kennametal for an allocable portion of Kennametal's
facility and/or commitment fees under its credit lines.
Warehousing Agreements
The Company and Kennametal will enter into separate warehousing agreements
with respect to (i) Kennametal distribution centers and warehouses which store
products for the Company and (ii) Company distribution centers and warehouses
that store products for Kennametal. The terms of each warehousing agreement
provide for the warehouser to store the warehousee's products in the warehouses
segregated and separate from the warehouser's products and upon request by the
warehousee to ship its products from these warehouses to the warehousee's
customers. The warehousee will pay to the warehouser a charge for each of the
products picked, packed and shipped based upon an allocation of costs (including
overhead) incurred by the warehouser at these warehouses.
Corporate Agreement
The Company and Kennametal will enter into a corporate agreement under
which the Company grants to Kennametal a continuing option, transferable, in
whole or in part, to any of its affiliates, to purchase, under certain
circumstances, additional shares of Class B Common Stock or Class A Common Stock
(the "Stock Option"). The Stock Option may be exercised by Kennametal
simultaneously with the issuance of any equity security of the Company or
immediately prior to a Tax-Free Spin-Off to the extent necessary to maintain its
then existing percentage of the total voting power and economic value of the
Company at 80% of all outstanding Common Stock or, in connection with a Tax-Free
Spin Off, in order to acquire stock ownership necessary to effect a Tax-Free
Spin-Off. The purchase price of the shares of Common Stock purchased upon any
exercise of the Stock Option, subject to certain exceptions, will be based on
the market price of the Class A Common Stock.
ACQUISITIONS
On April 30, 1997, the Company acquired all of the outstanding stock of the
Strelinger Company ("Strelinger"). Strelinger, with annualized sales of
approximately $30 million in 1996, is based in Troy, Michigan and is engaged in
the distribution of metalcutting tools and industrial supplies. The Company paid
approximately $4.0 million in cash and assumed certain liabilities totaling
approximately $7.0 million. The acquisition will be accounted for using the
purchase method of accounting and the results of operations of Strelinger will
be included in the consolidated financial statements after the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired was approximately $5.0 million and will be amortized on a straight-line
basis over 20 years.
F-15
<PAGE> 84
On May 30, 1997, the Company acquired all of the outstanding stock of Mill
& Abrasive Supply, Inc. ("M&A"). M&A, with sales of approximately $6.0 million
in 1996, is based in Roseville, Michigan and is engaged in the distribution of
metalcutting tools and industrial supplies. The Company paid approximately $1.2
million and assumed certain liabilities totaling $1.5 million to acquire M&A.
The acquisition will be accounted for using the purchase method of accounting
and the results of operations of M&A will be included in the Consolidated
Financial Statements after the date of acquisition.
The Company borrowed the necessary funds from Kennametal to pay for these
acquisitions and will use a portion of the net proceeds of the Offering to repay
Kennametal.
STOCK OPTION PLAN
The Company will adopt a stock option plan (the "Stock Option Plan") under
which directors, officers and employees may be granted options to purchase
shares of Class A Common Stock. Options are granted at fair market value at the
date of grant. Options are exercisable under specified conditions for up to 10
years from the date of grant. Under provisions of the Stock Option Plan,
participants may deliver to the Company stock in payment of the option price and
receive credit for the fair market value of the shares of Class A Common Stock
delivered on the date of delivery. Upon consummation of the Offering, the
Company intends to grant stock options to executive officers and directors to
acquire 450,000 shares of Class A Common Stock.
TERMINATION OF LARGE CONTRACT
For the nine month period ended March 31, 1997, the Company had $225.2
million in net sales of which $39.6 million of net sales were related to a Full
Service Supply Program contract with General Electric Corporation ("GE") for
services provided at certain metalworking manufacturing facilities within GE's
Aircraft Engine Group (the "GE Contract"). The operating margin related to the
GE Contract was lower than the Company's other Full Service Supply Program
contracts. Many of the products provided by the Company to GE under the GE
Contract fell outside of the Company's core focus on metalworking consumables
and related products.
In April 1997, the Company conducted extensive negotiations with GE
relating to the continuation of the GE Contract. After careful evaluation, the
Company concluded that it was not in its best interest to accede to certain
price concessions requested by GE. As a result, GE served notice to the Company
that the GE Contract would not be renewed for a significant portion of the
manufacturing facilities served by the Company.
The Company is currently developing a plan of disengagement from those
manufacturing sites that are not being continued. Although such plan has not yet
been fully developed and reviewed with GE, the Company expects that it will
result in a gradual reduction in future sales to GE until the implementation of
this disengagement plan is completed, which is expected to occur by June 1998.
In fiscal 1998 in conjunction with such disengagement, the Company expects sales
to GE to amount to approximately 30% of the total amounts to be received by the
Company in fiscal 1997 under the GE Contract. After fiscal 1998, estimated sales
to GE for those manufacturing sites that will continue to be served by the Full
Service Supply programs are expected to amount to approximately 10% of the total
amounts to be received by the Company in fiscal 1997 under the GE Contract.
The Company is currently redeploying its resources related to the GE
Contract to take advantage of requests by certain current Full Service Supply
program customers to ramp-up their existing programs at an increased rate as
well as to offer Full Service Supply programs to new customers. However, there
can be no assurance that the Company will be able to replace the revenues
received from the GE Contract within the foreseeable future period or at all. No
other single customer accounted for more than 6% of the Company's total net
sales for fiscal 1996 or for the nine months ended March 31, 1997.
F-16
<PAGE> 85
LINE OF CREDIT
On April 25, 1997, the Company, through J&L, obtained a $25.0 million line
of credit with a bank and shortly thereafter borrowed $20.0 million under the
line of credit to fund a dividend to Kennametal. Upon completion of the
Offering, a portion of the net proceeds will be used to repay the borrowings
under the line of credit. Interest payable under the line of credit is based on
the LIBOR rate plus 25 basis points and is required to be repaid in full within
six months. Kennametal has guaranteed repayment of the line of credit in the
event of default by the Company.
PRO FORMA INFORMATION
On April 23, 1997, J&L declared a dividend of $20.0 million payable to
Kennametal which was paid on April 28, 1997. The pro forma balance sheet as of
March 31, 1997 reflects this dividend payable at that date. Pro forma weighted
average common shares outstanding have been presented on a basis which gives pro
forma effect to (i) the issuance of the Class B Common Stock for all periods
presented, and (ii) the assumed issuance for fiscal 1996 and the nine months
ended March 31, 1997 of 375,353 shares of Class A Common Stock to fund the
excess of dividends over net income for the nine months ended March 31, 1997.
F-17
<PAGE> 86
[MAP OF COMPANY SHOWROOM AND
DISTRIBUTION CENTER LOCATIONS]
<PAGE> 87
===============================================================================
NO DEALER, SALES PERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO
MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY THE CLASS A
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 10
Use of Proceeds...................... 16
Dividend Policy...................... 16
Capitalization....................... 17
Dilution............................. 18
Selected Consolidated Financial and
Operating Data..................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................. 28
Management........................... 38
Security Ownership of Principal
Shareholder and Management......... 47
Relationship with Kennametal......... 49
Description of Capital Stock......... 57
Shares Eligible for Future Sale...... 63
Underwriting......................... 65
Legal Matters........................ 67
Experts.............................. 67
Additional Information............... 67
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
===============================================================================
4,257,000 SHARES
LOGO
CLASS A COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
, 1997
===============================================================================
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses incurred in connection with the
sale and distribution of the securities being registered which will be paid
solely by the Company. All the amounts shown are estimates, except the
Commission registration fee, the listing fee and the NASD filing fee.
<TABLE>
<S> <C>
Commission Registration Fee............................................ $ 33,304
NASD Filing Fee........................................................ 10,500
NYSE Listing Fee....................................................... 121,300
Blue Sky Fees and Expenses............................................. 7,500
Transfer Agent and Registrar Fees and Expenses......................... 10,000
Accounting Fees and Expenses........................................... 225,000
Legal Fees and Expenses................................................ 475,000
Printing and Engraving Expenses........................................ 300,000
Miscellaneous Expenses................................................. 217,396
-----------
Total............................................................. $ 1,400,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law
(the "PBCL") provides in general that a corporation may indemnify any person,
including its directors, officers and employees who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative (including
actions by or in the right of the corporation) by reason of the fact that he or
she is or was a representative of or serving at the request of the corporation,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
the action or proceedings if he or she is determined by the board of directors,
or in certain circumstances by independent legal counsel to the shareholders, to
have acted in good faith and in a manner he or she reasonably believed to be in,
or not opposed to, the best interests of the corporation and, with respect to
any criminal proceeding, had no reason to believe his conduct was unlawful. In
the case of actions by or in the right of the corporation, indemnification is
not permitted in respect of any claim, issue or matter as to which the person
has been adjudged to be liable to the corporation except to the extent a court
determines that the person is fairly and reasonably entitled to indemnification.
In any case, to the extent that the person has been successful on the merits or
otherwise in defense of any claim, issue or matter, he or she shall be
indemnified against expenses (including attorney's fees) actually and reasonably
incurred by him or her in connection therewith. Subchapter D also provides that
the indemnification permitted or required by Subchapter D is not exclusive of
any other rights to which a person seeking indemnification may be entitled.
The Company's By-Laws provide that except as prohibited by law, every
director and officer of the Company is entitled to be indemnified by the Company
against reasonable expenses and any liability paid or incurred by such person in
connection with any actual or threatened claim, action, suit or proceeding,
civil, criminal, administrative, investigative or other in which he or she may
be involved by reason of being or having been a Director or Officer of the
Company or by reason that such person is or was serving at the request of the
Company as a director, officer, employee, fiduciary or other representative of
another corporation, partnership, joint venture, trust, employee benefit plan or
other entity. Such indemnification includes the right to have expenses incurred
paid in advance by the Company prior to final disposition, subject to such
conditions as may be prescribed by law. Persons who are not directors or
officers of the Company may be similarly indemnified in respect of service to
the Company or to another such entity at the request of the Company, to the
extent the Board of Directors designates. Expenses included fees and expenses of
counsel selected by such person, and liability includes amount of judgments,
excise taxes, fines and penalties, and amounts paid in settlement.
Indemnification pursuant to this provision of the Company's By-laws is not
permitted in any case in which the
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<PAGE> 89
act or failure to act giving rise to the claim for indemnification is determined
by a court to have constituted willful misconduct or recklessness. There may be
other circumstances where indemnification may not be permitted as a matter of
public policy.
The By-Laws of the Company also provide that to the fullest extent that the
laws of the Commonwealth of Pennsylvania, as now in effect or as hereafter
amended, permit elimination of limitation of the liability of directors, no
director of the Company shall be personally liable for monetary damages as such
for any action taken, or any failure to take any action, as a director. Under
Section 1713 of the PBCL, the personal liability of a director may not be
eliminated or limited if: (1) the director has breached or failed to perform the
duties of his office under Subchapter B of Chapter 17 of the PBCL (relating to
the fiduciary duties of directors; and (2) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. Furthermore, this
limitation to the personal liability of directors of the Company does not apply
to (1) the responsibility or liability of a director pursuant to any criminal
statute; or (2) the liability of a director for the payment of taxes pursuant to
local, state or federal law.
The Company purchases director and officer liability insurance covering its
directors and officers with respect to liability which they may incur in
connection with their serving as such. Under the insurance, the Company will
receive reimbursement for amounts as to which the directors and officers are
indemnified under the Company's By-Laws. The insurance may also provide certain
additional coverage for the directors and officers against certain liability
even though such liability is not subject to indemnification under the Company's
By-Laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company issued shares of Class B Common Stock to Kennametal Inc. in
connection with the formation of the Company in a transaction exempt from
registration by virtue of Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ---------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement
2.a Form of Agreement by and among Kennametal Inc., JLK Direct Distribution Inc. and
J&L America, Inc. contributing certain assets
2.b Form of Intra Group Asset Contribution and Transfer Agreement
3.a Amended and Restated Articles of Incorporation of the Registrant**
3.b By-Laws of the Registrant**
5 Opinion of Buchanan Ingersoll Professional Corporation
10.a Form of Administrative Services Agreement**
10.b Form of Corporate Agreement**
10.c Form of Indemnification Agreement**
10.d Form of Intercompany Debt/Investment and Cash Management Agreement**
10.e Form of Non-Competition and Corporate Opportunities Allocation Agreement**
10.f Form of Shared Facilities Agreements (Subleases)**
10.g Form of Tax Sharing Agreement**
10.h Form of Trademark License Agreement**
10.i Form of Warehousing Agreements**
10.j Form of Lease Agreement**
10.k Form of Product Supply Agreement**
10.l Form of JLK Direct Distribution Inc. 1997 Stock Option and Incentive Plan
10.m Kennametal Inc. Supplemental Executive Retirement Plan**
</TABLE>
II-2
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ---------------------------------------------------------------------------------
<S> <C>
10.n Kennametal Inc. Employment Agreement with Michael W. Ruprich**
10.o Form of JLK Direct Distribution Inc. Employment Agreement with Michael W.
Ruprich**
10.p Form of JLK Direct Distribution Inc. Employment Agreement with Kenneth M.
McHenry**
10.q Form of JLK Direct Distribution Inc. Employment Agreement with Roland E.
Lazzaro**
10.r Form of JLK Direct Distribution Inc. Employment Agreement with Michael J.
Mussog**
10.s Description of JLK Direct Distribution Inc. Management Bonus Plan
11.1 Calculation of Primary Net Income per Share**
21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Buchanan Ingersoll Professional Corporation*
24 Powers of Attorney (included as part of the signature page hereof)
27 Financial Data Schedule**
</TABLE>
- ---------
* included in their opinion filed as Exhibit 5
** Previously filed
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by a final
adjudication of such issue.
(3) The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
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<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment Number 2 to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in Latrobe,
Pennsylvania, on June 20, 1997.
JLK DIRECT DISTRIBUTION INC.
By: *
--------------------------------------
Michael W. Ruprich
President
Pursuant to the requirements of the Securities Act of 1933, Amendment
Number 2 to this Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints William R. Newlin and David T. Cofer, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any and all related Registration
Statements (including amendments thereto) filed pursuant to Rule 462(b)
promulgated under the Securities Act of 1933 , and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, or their substitutes,
may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURES TITLES DATES
<C> <S> <C>
* President and Director June 20, 1997
- ------------------------------------------ (Principal Executive Officer)
Michael W. Ruprich
* Vice President and Chief June 20, 1997
- ------------------------------------------ Financial Officer (Principal
Michael J. Mussog Financial and Accounting
Officer)
* Director June 20, 1997
- ------------------------------------------
Richard C. Alberding
* Director June 20, 1997
- ------------------------------------------
Jeffery M. Boetticher
* Director June 20, 1997
- ------------------------------------------
Irwin L. Elson
* Director June 20, 1997
- ------------------------------------------
Robert L. McGeehan
* Director June 20, 1997
- ------------------------------------------
Aloysius T. McLaughlin, Jr.
* Chairman of the Board of June 20, 1997
- ------------------------------------------ Directors
William R. Newlin
</TABLE>
*By: /s/ DAVID T. COFER
--------------------------------------
David T. Cofer
Attorney-in-Fact
II-4
<PAGE> 92
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULES
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of JLK Direct Distribution Inc. and have
issued our report thereon dated April 25, 1997. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the accompanying index is presented for purposes
of complying with the Securities and Exchange Commission's rules and regulations
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
April 25, 1997
S-1
<PAGE> 93
SCHEDULE II
JLK DIRECT DISTRIBUTION INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE CHARGED
AT TO BALANCE
BEGINNING COSTS AT
OF AND END OF
PERIOD ENDED DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ------------------ ------------------------------------ -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
June 30, 1994 Allowance for doubtful accounts $120,524 $176,528 $(148,776) $148,276
June 30, 1995 Allowance for doubtful accounts $148,276 $142,500 $(138,934) $151,842
June 30, 1996 Allowance for doubtful accounts $151,842 $25,713 -- $174,990
</TABLE>
S-2
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ------------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement
2.a Form of Agreement by and among Kennametal Inc., JLK Direct Distribution Inc. and J&L
America, Inc. contributing certain assets
2.b Form of Intra Group Asset Contribution and Transfer Agreement
3.a Amended and Restated Articles of Incorporation of the Registrant**
3.b By-Laws of the Registrant**
5 Opinion of Buchanan Ingersoll Professional Corporation
10.a Form of Administrative Services Agreement**
10.b Form of Corporate Agreement**
10.c Form of Indemnification Agreement**
10.d Form of Intercompany Debt/Investment and Cash Management Agreement**
10.e Form of Non-Competition and Corporate Opportunities Allocation Agreement**
10.f Form of Shared Facilities Agreements (Subleases)**
10.g Form of Tax Sharing Agreement**
10.h Form of Trademark License Agreement**
10.i Form of Warehousing Agreements**
10.j Form of Lease Agreement**
10.k Form of Product Supply Agreement**
10.l Form of JLK Direct Distribution Inc. 1997 Stock Option and Incentive Plan
10.m Kennametal Inc. Supplemental Executive Retirement Plan**
10.n Kennametal Inc. Employment Agreement with Michael W. Ruprich**
10.o Form of JLK Direct Distribution Inc. Employment Agreement with Michael W. Ruprich**
10.p Form of JLK Direct Distribution Inc. Employment Agreement with Kenneth M. McHenry**
10.q Form of JLK Direct Distribution Inc. Employment Agreement with Roland E. Lazzaro**
10.r Form of JLK Direct Distribution Inc. Employment Agreement with Michael J. Mussog**
10.s Description of JLK Direct Distribution Inc. Management Bonus Plan
11.1 Calculation of Primary Net Income per Share**
21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Buchanan Ingersoll Professional Corporation*
24 Powers of Attorney (included as part of the signature page hereof)
27 Financial Data Schedule**
</TABLE>
- ---------
* included in their opinion filed as Exhibit 5
** Previously filed
<PAGE> 1
EXHIBIT 1
JLK DIRECT DISTRIBUTION INC.
(a Pennsylvania corporation)
4,257,000 Shares of Class A Common Stock
PURCHASE AGREEMENT
Dated: June , 1997
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
PURCHASE AGREEMENT.......................................................... 1
SECTION 1. Representations and Warranties.................................. 3
(a) Representations and Warranties by the Company and the Principal
Shareholder..................................................... 3
(i) Compliance with Registration Requirements............ 3
(ii) Independent Accountants.............................. 4
(iii) Financial Statements................................. 4
(iv) No Material Adverse Change in Business............... 4
(v) Good Standing of the Company......................... 5
(vi) Good Standing of Subsidiaries........................ 5
(vii) Capitalization....................................... 5
(viii) Authorization of Agreement........................... 5
(ix) Authorization and Description of Securities.......... 6
(x) Absence of Defaults and Conflicts.................... 6
(xi) Absence of Labor Dispute............................. 6
(xii) Absence of Proceedings............................... 7
(xiii) Accuracy of Exhibits................................. 7
(xiv) Possession of Intellectual Property.................. 7
(xv) Absence of Further Requirements...................... 7
(xvi) Possession of Licenses and Permits................... 8
(xvii) Title to Property.................................... 8
(xviii) Investment Company Act............................... 8
(xix) Environmental Laws................................... 8
(xx) Registration Rights.................................. 9
(xxi) Related Party Transactions........................... 9
(xxii) Employee Matters..................................... 9
(xxiii) Taxes................................................10
(b) Representations and Warranties by the Principal Shareholder.....10
(i) Good Standing of the Principal Shareholder...........10
(ii) Authorization of Agreement...........................10
(iii) Absence of Defaults and Conflicts....................10
(iv) Absence of Further Requirements......................11
(c) Officer's Certificates..........................................11
SECTION 2. Sale and Delivery to Underwriters; Closing......................11
(a) Initial Securities..............................................11
(b) Option Securities...............................................11
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
(c) Payment.........................................................12
(d) Denominations; Registration.....................................12
SECTION 3. Covenants of the Company....................................... 12
(a) Compliance with Securities Regulations and Commission Requests..12
(b) Filing of Amendments............................................13
(c) Delivery of Registration Statements.............................13
(d) Delivery of Prospectuses........................................13
(e) Continued Compliance with Securities Laws.......................14
(f) Blue Sky Qualifications.........................................14
(g) Rule 158........................................................14
(h) Use of Proceeds.................................................15
(i) Listing.........................................................15
(j) Restriction on Sale of Securities...............................15
(k) Reporting Requirements..........................................15
(l) Compliance with Rule 463........................................15
(m) Compliance with NASD Rules......................................15
SECTION 4. Payment of Expenses.............................................16
(a) Expenses........................................................16
(b) Termination of Agreement........................................16
SECTION 5. Conditions Of Underwriters' Obligations.........................16
(a) Effectiveness of Registration Statement.........................17
(b) Opinion of Counsel for Company and the Principal Shareholder....17
(c) Opinion of Counsel for Underwriters.............................17
(d) Officers' Certificates..........................................17
(e) Accountant's Comfort Letter.....................................18
(f) Bring-down Comfort Letter.......................................18
(g) Approval of Listing.............................................18
(h) No Objection....................................................18
(i) Lock-up Agreements..............................................18
(j) Conditions to Purchase of Option Securities.....................19
(k) Additional Documents............................................19
(l) Termination of Agreement........................................20
SECTION 6. Indemnification.................................................20
(a) Indemnification of Underwriters.................................20
(b) Indemnification of Company, Directors and Officers..............21
(c) Actions against Parties; Notification...........................21
(d) Settlement without Consent if Failure to Reimburse..............22
(e) Indemnification for Reserved Securities.........................22
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 7. Contribution....................................................22
SECTION 8. Representations, Warranties and Agreements to Survive Delivery..24
SECTION 9. Termination of Agreement........................................24
(a) Termination; General............................................24
(b) Liabilities.....................................................24
SECTION 10. Default by One or More of the Underwriters.....................24
SECTION 11. Notices........................................................25
SECTION 12. Parties........................................................26
SECTION 13. GOVERNING LAW AND TIME.........................................26
SECTION 14. Effect of Headings.............................................26
SCHEDULES
Schedule A - List of Underwriters.............................Sch A-1
Schedule B - Pricing Information..............................Sch B-1
Schedule C - Entities Subject to Lock-Up......................Sch C-1
EXHIBITS
Exhibit A-1 - Form of Opinion of Company's Counsel................A-1
Exhibit A-2 - Form of Opinion of Principal Shareholder's Counsel..A-2
Exhibit B - Form of Lock-Up from Kennametal Inc.................B-1
</TABLE>
iii
<PAGE> 5
JLK DIRECT DISTRIBUTION INC.
(a Pennsylvania corporation)
4,257,000 Shares of Class A Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
June , 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
GOLDMAN, SACHS & CO.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
JLK Direct Distribution Inc., a Pennsylvania corporation (the
"Company"), and Kennametal Inc., a Pennsylvania corporation and the principal
shareholder of the Company (the "Principal Shareholder"), confirm their
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch and Goldman, Sachs & Co. are acting as
representatives (in such capacity, the "Representatives"), with respect to the
issue and sale by the Company and the purchase by the Underwriters, acting
severally and not jointly, of the respective numbers of shares of Class A
Common Stock, par value $.01 per share, of the Company ("Class A Common Stock")
set forth in said Schedule A, and with respect to the grant by the Company to
the Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase all or any part of 640,000 additional shares of
Class A Common Stock to cover over-allotments, if any. The aforesaid 4,257,000
shares of Class A Common Stock (the "Initial Securities") to be purchased by
the Underwriters and all or any part of the 640,000 shares of Class A Common
Stock subject to the
1
<PAGE> 6
option described in Section 2(b) hereof (the "Option Securities") are
hereinafter called, collectively, the "Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company and the Underwriters agree that up to 212,850 shares of
the Securities to be purchased by the Underwriters (the "Reserved Securities")
shall be reserved for sale by the Underwriters to certain eligible employees
and persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of
this Agreement, the applicable rules, regulations and interpretations of the
National Association of Securities Dealers, Inc. and all other applicable laws,
rules and regulations. To the extent that such Reserved Securities are not
orally confirmed for purchase by such eligible employees and persons having
business relationships with the Company by the end of the first business day
after the date of this Agreement, such Reserved Securities may be offered to
the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-25989) covering the
registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will
either (i) prepare and file a prospectus in accordance with the provisions of
Rule 430A ("Rule 430A") of the rules and regulations of the Commission under
the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule
424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely
upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term
sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule
424(b). The information included in such prospectus or in such Term Sheet, as
the case may be, that was omitted from such registration statement at the time
it became effective but that is deemed to be part of such registration
statement at the time it became effective (a) pursuant to paragraph (b) of Rule
430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d)
of Rule 434 is referred to as "Rule 434 Information." Each prospectus used
before such registration statement became effective, and any prospectus that
omitted, as applicable, the Rule 430A Information or the Rule 434 Information,
that was used after such effectiveness and prior to the execution and delivery
of this Agreement, is herein called a "preliminary prospectus." Such
registration statement, including the exhibits thereto and schedules thereto at
the time it became effective and including the Rule 430A Information and the
Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the
1933 Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final prospectus in the
form first furnished to the Underwriters for use in connection with the
offering of the Securities is herein called the "Prospectus." If Rule 434 is
relied on, the term "Prospectus" shall refer to the
2
<PAGE> 7
preliminary prospectus dated June 4, 1997 together with the Term Sheet and all
references in this Agreement to the date of the Prospectus shall mean the date
of the Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the Prospectus or any Term
Sheet or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company and the Principal
Shareholder. The Company and the Principal Shareholder jointly and severally
represent and warrant to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b) hereof, and agree with each
Underwriter, as follows (provided that, for the purposes of the following,
references herein to the Company and/or its subsidiaries shall also include, as
required by the context, the business of the Company and its subsidiaries as
conducted by the Principal Shareholder prior to the transfer of that business
to the Company on June __, 1997):
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or,
to the knowledge of the Company or the Principal Shareholder, are
contemplated by the Commission, and any request on the part of the
Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments
thereto became effective and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments
and supplements thereto complied and will comply in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations and did not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading,
and the Prospectus, any preliminary prospectus and any supplement
thereto or prospectus wrapper prepared in connection therewith, at
their respective times of issuance and at the Closing Time, complied
and will comply in all material respects with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus and such
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the offer and sale of Reserved
Securities. Neither the Prospectus nor any amendments or supplements
thereto (including any prospectus wrapper), at the time the Prospectus
or any such amendment or supplement was issued and at the Closing Time
(and, if any Option Securities are purchased, at the Date of
Delivery), included or will include an untrue
3
<PAGE> 8
statement of a material fact or omitted or will omit to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectus shall not be "materially
different", as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became
effective. The representations and warranties in this subsection shall
not apply to statements in or omissions from the Registration
Statement or Prospectus made in reliance upon and in conformity with
information furnished to the Company in writing by any Underwriter
through Merrill Lynch expressly for use in the Registration Statement
or Prospectus.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The Consolidated Statements of Income,
Consolidated Balance Sheets, Consolidated Statements of Cash Flows,
Consolidated Statements of Shareholder's Equity and Pro Forma Balance
Sheet included in the Registration Statement and the Prospectus,
together with the related schedules and notes, present fairly the
financial position of the Company and its consolidated subsidiaries at
the dates indicated and the statement of operations, shareholders'
equity and cash flows of the Company and its consolidated subsidiaries
for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods
involved. The supporting schedules included in the Registration
Statement present fairly in accordance with GAAP the information
required to be stated therein. The selected financial data and the
summary financial information included in the Prospectus present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in
the Registration Statement.
(iv) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement
and the Prospectus, except as otherwise stated therein, (A) there has
been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects
of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course
4
<PAGE> 9
of business (a "Material Adverse Effect"), (B) there have been no
transactions entered into by the Company or any of its subsidiaries,
other than those in the ordinary course of business, which are
material with respect to the Company and its subsidiaries considered
as one enterprise, and (C) there has been no dividend or distribution
of any kind declared, paid or made by the Company on any class of its
capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the Commonwealth of Pennsylvania and has corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter into
and perform its obligations under this Agreement; and the Company is
duly qualified as a foreign corporation to transact business and is in
good standing in each other jurisdiction in which such qualification
is required, whether by reason of the ownership or leasing of property
or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each "significant subsidiary"
of the Company (as such term is defined in Rule 1-02 of Regulation
S-X, and collectively the "subsidiaries"), including J&L America,
Inc., a Michigan corporation and a wholly owned subsidiary of the
Company, has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a
Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital
stock of each such subsidiary has been duly authorized and validly
issued, is fully paid and non-assessable and is owned by the Company,
directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity; none
of the outstanding shares of capital stock of any subsidiary was
issued in violation of the preemptive or similar rights of any
securityholder of such subsidiary. The only subsidiaries of the
Company are the subsidiaries listed on Exhibit 21 to the Registration
Statement.
(vii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except
for subsequent issuances, if any, pursuant to this Agreement, pursuant
to reservations, agreements or employee benefit plans referred to in
the Prospectus or pursuant to the exercise of convertible securities
or options referred to in the Prospectus). The shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
5
<PAGE> 10
outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any
securityholder of the Company.
(viii) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the
Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid
and non-assessable; the Class A Common Stock and the Company's Class B
Common Stock, par value $.01 per share (the "Class B Common Stock"),
conforms to all statements relating thereto contained in the
Prospectus and such description conforms to the rights set forth in
the instruments defining the same; no holder of the Securities will be
subject to personal liability by reason of being such a holder; and
the issuance of the Securities is not subject to the preemptive or
other similar rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor any
of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or other
agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound, or
to which any of the property or assets of the Company or any
subsidiary is subject (collectively, "Agreements and Instruments")
except for such defaults that would not result in a Material Adverse
Effect; and the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein and in
the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities
as described in the Prospectus under the caption "Use of Proceeds")
and compliance by the Company with its respective obligations
hereunder have been duly authorized by all necessary corporate action
and do not and will not, whether with or without the giving of notice
or passage of time or both, conflict with or constitute a breach of,
or default or Repayment Event (as defined below, and only with respect
to a Repayment Event, except as may be described in the Registration
Statement) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or
any subsidiary pursuant to, the Agreements and Instruments (except for
such conflicts, breaches or defaults or liens, charges or encumbrances
that would not result in a Material Adverse Effect), nor will such
action result in any violation of the provisions of the charter or
by-laws of the Company or any subsidiary or any applicable law,
statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any subsidiary or any of their
assets, properties or operations. As used herein, a "Repayment Event"
means any event or condition which gives the holder of any note,
debenture or other evidence of
6
<PAGE> 11
indebtedness (or any person acting on such holder's behalf) the right
to require the repurchase, redemption or repayment of all or a portion
of such indebtedness by the Company or any subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any subsidiary exists or, to the knowledge
of the Company or the Principal Shareholder, is imminent, and the
Company and the Principal Shareholder are not aware of any existing or
imminent labor disturbance by the employees of any of the Company's or
any subsidiary's or the Principal Shareholder's principal suppliers,
manufacturers, customers or contractors, which, in either case, may
reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company or the Principal Shareholder, threatened,
against or affecting the Company or any subsidiary or the Principal
Shareholder, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might reasonably
be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the
properties or assets thereof or the consummation of the transactions
contemplated in this Agreement or the performance by the Company and
the Principal Shareholder of their respective obligations hereunder;
the aggregate of all pending legal or governmental proceedings to
which the Company or any subsidiary is a party or of which any of
their respective property or assets is the subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be
expected to result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or
the Prospectus or to be filed as exhibits thereto which have not been
so described and filed as required.
(xiv) Possession of Intellectual Property. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property")
necessary to carry on the business now operated by them, and neither
the Company nor any of its subsidiaries or the Principal Shareholder
has received any notice or is otherwise aware of any infringement of
or conflict with asserted rights of others with respect to any
Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company or any of its subsidiaries therein, and which
infringement or conflict (if the subject of any
7
<PAGE> 12
unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, would result in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance
or sale of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except (i) such as have
been already obtained or as may be required under the 1933 Act or the
1933 Act Regulations or state securities laws and (ii) such as have
been obtained under the laws and regulations of jurisdictions outside
the United States in which the Reserved Securities are offered.
(xvi) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and
other authorizations (collectively, "Governmental Licenses") issued by
the appropriate federal, state, local or foreign regulatory agencies
or bodies necessary to conduct the business now operated by them; the
Company and its subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect would not have a Material Adverse Effect; and neither
the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in
a Material Adverse Effect.
(xvii) Title to Property. The Company and its subsidiaries have
good title to all other properties owned by them, in each case, free
and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a)
are described in the Prospectus or (b) do not, singly or in the
aggregate, materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property
by the Company or any of its subsidiaries; and all of the leases and
subleases material to the business of the Company and its
subsidiaries, considered as one enterprise, and under which the
Company or any of its subsidiaries holds properties described in the
Prospectus, are in full force and effect, and neither the Company nor
any subsidiary has any notice of any material claim of any sort that
has been asserted by anyone adverse to the rights of the Company or
any subsidiary under any of the leases or subleases mentioned above,
or affecting or questioning the rights of the Company or such
subsidiary to the continued possession of the leased or subleased
premises under any such lease or sublease.
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<PAGE> 13
(xviii) Investment Company Act. The Company and its subsidiaries
are not, and upon the issuance and sale of the Securities as herein
contemplated and the application of the net proceeds therefrom as
described in the Prospectus will not be, "investment companies" or
entities "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended (the "1940
Act").
(xix) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result
in a Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of
common law or any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent, decree or
judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata) or wildlife,
including, without limitation, laws and regulations relating to the
release or threatened release of chemicals, pollutants, contaminants,
wastes, toxic substances, hazardous substances, petroleum or petroleum
products (collectively, "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) the Company and its subsidiaries have all permits,
authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any
of its subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(xx) Registration Rights. Except as set forth in the Corporate
Agreement (as defined in the Prospectus), there are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xxi) Related Party Transactions. No relationship, direct or
indirect, exists between or among the Company on the one hand, and the
directors, officers, shareholders, customers or suppliers of the
Company on the other hand, which is required to be described in the
Prospectus which is not so described.
(xxii) Employee Matters. The Company and any entity which would be
treated as a single employer under Section 414(b), (c), (m) or (o) of
the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the "Code")
(each such entity, an "ERISA Affiliate"), is in compliance in all
material respects
9
<PAGE> 14
with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"), and, if applicable,
the Code; no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the
Company or any ERISA Affiliate would have any liability; neither the
Company nor any ERISA Affiliate has incurred or expects to incur
liability under (i) Title IV of ERISA with respect to termination of,
or withdrawal from, any such "pension plan" or (ii) Sections 412 or
4971 of the Code; and each "pension plan" for which the Company or any
ERISA Affiliate would have any liability that is intended to be
qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
(xxiii) Taxes. The Principal Shareholder has filed all federal,
state and local income and franchise tax returns required to be filed
through the date hereof and has paid all taxes due thereon, and no tax
deficiency has been determined adversely to the Principal Shareholder
or any of its subsidiaries which has had (nor does the Principal
Shareholder have any knowledge of any tax deficiency which, if
determined adversely to the Principal Shareholder or any of its
subsidiaries, might have) a Material Adverse Effect or a material
adverse effect on the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Principal
Shareholder and its subsidiaries (other than the Company) considered
as one enterprise.
(b) Representations and Warranties by the Principal Shareholder. The
Principal Shareholder represents and warrants to each Underwriter as of the
date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as
of each Date of Delivery (if any) referred to in Section 2(b) hereof, and
agrees with each Underwriter, as follows:
(i) Good Standing of the Principal Shareholder. The Principal
Shareholder has been duly organized and is validly existing as a
corporation in good standing under the laws of the Commonwealth of
Pennsylvania and has corporate power and authority to enter into and
perform its obligations under this Agreement.
(ii) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Principal Shareholder.
(iii) Absence of Defaults and Conflicts. The execution, delivery
and performance of this Agreement and the consummation of the
transactions contemplated herein and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the
Prospectus under the caption "Use of Proceeds") and compliance by the
Principal Shareholder with its respective obligations hereunder have
been duly authorized by all necessary corporate action and do not and
will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or default or
Repayment Event under, or result in
10
<PAGE> 15
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Principal Shareholder or any of its
subsidiaries pursuant to, any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Principal Shareholder or any of its
subsidiaries is a party or by which it or any of them may be bound, or
to which any of the property or assets of the Principal Shareholder or
any of its subsidiaries is subject, nor will such action result in any
violation of the provisions of the charter or by-laws of the Principal
Shareholder or any of its subsidiaries or any applicable law, statute,
rule, regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Principal Shareholder or any of its subsidiaries
or any of their assets, properties or operations.
(iv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Principal
Shareholder of its obligations hereunder, in connection with the
offering, issuance or sale of the Securities hereunder or the
consummation of the transactions contemplated by this Agreement,
except such as have been already obtained or as may be required under
the 1933 Act or the 1933 Act Regulations or state securities laws.
(c) Officer's Certificates. Any certificate signed by any officer of
the Company or any of its subsidiaries or by any officer of the Principal
Shareholder delivered to the Representatives or to counsel for the Underwriters
shall be deemed a representation and warranty by the Company or the Principal
Shareholder, as the case may be, to each Underwriter as to the matters covered
thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number of
Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase up to an additional
640,000 shares of Class A Common Stock at the price per share set forth in
Schedule B, less an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial Securities but not payable
on the Option Securities. The option hereby granted will expire 30 days after
the date hereof and may be exercised in whole or in part from time to time
11
<PAGE> 16
only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Initial Securities upon
notice by the Representatives to the Company setting forth the number of Option
Securities as to which the several Underwriters are then exercising the option
and the time and date of payment and delivery for such Option Securities. Any
such time and date of delivery (a "Date of Delivery") shall be determined by
the Representatives, but shall not be later than seven full business days after
the exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Securities, each of the Underwriters, acting severally and not jointly,
will purchase that proportion of the total number of Option Securities then
being purchased which the number of Initial Securities set forth in Schedule A
opposite the name of such Underwriter bears to the total number of Initial
Securities, subject in each case to such adjustments as the Representatives in
their discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York, or at
such other place as shall be agreed upon by the Representatives and the
Company, at 9:30 A.M. (Eastern time) on the third (fourth, if the pricing
occurs after 4:30 P.M. (Eastern time) on any given day) business day after the
date hereof (unless postponed in accordance with the provisions of Section 10),
or such other time not later than ten business days after such date as shall be
agreed upon by the Representatives and the Company (such time and date of
payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Representatives and the Company, on each Date of Delivery as specified in the
notice from the Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery
to the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations
and registered in such names as the
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<PAGE> 17
Representatives may request in writing at least one full business day before
the Closing Time or the relevant Date of Delivery, as the case may be. The
certificates for the Initial Securities and the Option Securities, if any, will
be made available for examination and packaging by the Representatives in The
City of New York not later than 10:00 A.M. (Eastern time) on the business day
prior to the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify
the Representatives immediately, and confirm the notice in writing,
(i) when any post-effective amendment to the Registration Statement
shall become effective, or any supplement to the Prospectus or any
amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission
for any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information, and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale
in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect
the filings necessary pursuant to Rule 424(b) and will take such steps
as it deems necessary to ascertain promptly whether the form of
prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest
possible moment.
(b) Filing of Amendments. The Company will give the
Representatives notice of its intention to file or prepare any
amendment to the Registration Statement (including any filing under
Rule 462(b)), any Term Sheet or any amendment, supplement or revision
to either the prospectus included in the Registration Statement at the
time it became effective or to the Prospectus and will furnish the
Representatives with copies of any such documents a reasonable amount
of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or
counsel for the Underwriters shall object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Representatives and counsel for the
Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including
exhibits filed therewith or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will
also deliver to the Representatives, without charge, a conformed copy
of the Registration Statement as originally filed and of each
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<PAGE> 18
amendment thereto (without exhibits) for each of the Underwriters. The
copies of the Registration Statement and each amendment thereto
furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary
prospectus as such Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by
the 1933 Act. The Company will furnish to each Underwriter, without
charge, during the period when the Prospectus is required to be
delivered under the 1933 Act or the Securities Exchange Act of 1934
(the "1934 Act"), such number of copies of the Prospectus (as amended
or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to
the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit
the completion of the distribution of the Securities as contemplated
in this Agreement and in the Prospectus. If at any time when a
prospectus is required by the 1933 Act to be delivered in connection
with sales of the Securities, any event shall occur or condition shall
exist as a result of which it is necessary, in the opinion of counsel
for the Underwriters or for the Company, to amend the Registration
Statement or amend or supplement the Prospectus in order that the
Prospectus will not include any untrue statements of a material fact
or omit to state a material fact necessary in order to make the
statements therein not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, or if it shall be
necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement the Prospectus in
order to comply with the requirements of the 1933 Act or the 1933 Act
Regulations, the Company will promptly prepare and file with the
Commission, subject to Section 3(b), such amendment or supplement as
may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such
requirements, and the Company will furnish to the Underwriters such
number of copies of such amendment or supplement as the Underwriters
may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the
Securities for offering and sale under the applicable securities laws
of such states and other jurisdictions (domestic or foreign) as the
Representatives may designate and to maintain such qualifications in
effect for a period of not less than one year from the later of the
effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not
be obligated to file any general consent to service of process or to
qualify as a foreign
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<PAGE> 19
corporation or as a dealer in securities in any jurisdiction in which
it is not so qualified or to subject itself to taxation in respect of
doing business in any jurisdiction in which it is not otherwise so
subject. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from
the effective date of the Registration Statement and any Rule 462(b)
Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant
to the 1934 Act as are necessary in order to make generally available
to its securityholders as soon as practicable an earning statement for
the purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified
in the Prospectus under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect the
listing of the Class A Common Stock (including the Securities) on the
New York Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 180
days from the date of the Prospectus, the Company and the Principal
Shareholder each will not, without the prior written consent of
Merrill Lynch, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any share of Class A
Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock (including Class B Common Stock)
or file any registration statement under the 1933 Act with respect to
any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of the
Class A Common Stock or any securities convertible into or exercisable
or exchangeable for Class A Common Stock (including Class B Common
Stock), whether any such swap or transaction described in clause (i)
or (ii) above is to be settled by delivery of Class A Common Stock or
such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Securities to be sold hereunder, (B) any
shares of Class A Common Stock issued or options to purchase Class A
Common Stock granted pursuant to employee benefit plans of the Company
referred to in the Prospectus, or (C) the contribution by the
Principal Shareholder to the Company of up to an aggregate of 640,000
shares of Class B Common Stock in conjunction with an exercise by the
Underwriters of the option as to all or any portion of the Option
Securities.
(k) Reporting Requirements. The Company, during the period when
the Prospectus is required to be delivered under the 1933 Act or the
1934 Act, will file all documents
15
<PAGE> 20
required to be filed with the Commission pursuant to the 1934 Act
within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(l) Compliance with Rule 463. The Company will file with the
Commission such reports on Form SR as may be required pursuant to Rule
463 of the 1933 Act Regulations.
(m) Compliance with NASD Rules. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted as
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of this
Agreement. The Underwriters will notify the Company as to which
persons will need to be so restricted. At the request of the
Underwriters, the Company will direct the transfer agent to place a
stop transfer restriction upon such securities for such period of
time. Should the Company release, or seek to release, from such
restrictions any of the Reserved Securities, the Company agrees to
reimburse the Underwriters for any reasonable expenses (including,
without limitation, legal expenses) they incur in connection with such
release.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration
Statement (including financial statements and exhibits) as originally filed and
of each amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable upon
the sale, issuance or delivery of the Securities to the Underwriters, (iv) the
fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees
and the reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectus and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities and (ix) the filing fees
incident to, and the reasonable fees and disbursements of counsel to the
Underwriters in connection with, the review by the NASD of the terms of the
sale of the Securities, (x) the fees and expenses incurred in connection with
the listing of the Securities on the New York Stock Exchange and (xi) all costs
and expenses of the Underwriters, including the fees and disbursements of
counsel for the Underwriters, in connection with matters related to the
Reserved Securities which are designated by the Company for sale to employees
and others having a business relationship with the Company.
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<PAGE> 21
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
SECTION 5. Conditions Of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and the Principal Shareholder
contained in Section 1 hereof or in certificates of any officer of the Company
or any subsidiary of the Company or of the Principal Shareholder delivered
pursuant to the provisions hereof, to the performance by the Company of its
covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has
become effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by
the Commission, and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing
such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has
elected to rely upon Rule 434, a Term Sheet shall have been filed with
the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company and the Principal Shareholder.
At Closing Time, the Representatives shall have received the favorable
opinion, dated as of Closing Time, of (i) Buchanan Ingersoll
Professional Corporation, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, together with
signed or reproduced copies of such letter for each of the other
Underwriters to the effect set forth in Exhibit A-1 hereto and (ii)
Buchanan Ingersoll Professional Corporation, counsel for the Principal
Shareholder, in form and substance satisfactory to counsel for the
Underwriters, together with signed or reproduced copies of such letter
for each of the other Underwriters to the effect set forth in Exhibit
A-2, and, in each case, to such further effect as counsel to the
Underwriters may reasonably request.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Simpson Thacher & Bartlett, counsel for the
Underwriters, together with signed or reproduced copies of such letter
for each of the other Underwriters with respect to the matters set
forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or
other similar rights arising by operation of law or under the charter
or by-laws of the Company), (viii), (x), (xiv) (solely as to the
information in the Prospectus under "Description of Capital
Stock--Common Stock") and the penultimate paragraph of Exhibit A-1
hereto. In giving such opinion such
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<PAGE> 22
counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York and the
federal law of the United States, upon the opinions of counsel
satisfactory to the Representatives. Such counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to
the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.
(d) Officers' Certificates. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in
the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business, and the Representatives shall have received: (i) a
certificate of the President of the Company and of the chief financial
or chief accounting officer of the Company, dated as of Closing Time,
to the effect that (a) there has been no such material adverse change
with respect to the Company and its subsidiaries, (b) the
representations and warranties in Section 1(a) hereof are true and
correct with the same force and effect as though expressly made at and
as of Closing Time, (c) the Company has complied with all agreements
and satisfied all conditions on its part to be performed or satisfied
at or prior to Closing Time, and (d) no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
are contemplated by the Commission and (ii) a certificate of the
President or a Vice President of the Principal Shareholder and of the
chief financial or chief accounting officer of the Principal
Shareholder, dated as of Closing Time, to the effect that (x) there
has been no such material adverse change with respect to the Principal
Shareholder, (y) the representations and warranties of the Principal
Shareholder in Section 1(a) or 1(b) hereof are true and correct with
the same force and effect as though expressly made at and as of
Closing Time, and (z) the Principal Shareholder has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time.
(e) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the Representatives shall have received from Arthur
Andersen LLP a letter dated such date, in form and substance
satisfactory to the Representatives, together with signed or
reproduced copies of such letter for each of the other Underwriters
containing statements and information of the type ordinarily included
in accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in
the Registration Statement and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the
Representatives shall have received from Arthur Andersen LLP a letter,
dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (e) of
this Section, except that the specified date referred to shall be a
date not more than three business days prior to Closing Time.
18
<PAGE> 23
(g) Approval of Listing. At Closing Time, the Securities shall
have been approved for listing on the New York Stock Exchange, subject
only to official notice of issuance.
(h) No Objection. The NASD shall have confirmed that it has not
raised any objection with respect to the fairness and reasonableness
of the underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the
form of Exhibit B hereto signed by the entities listed on Schedule C
hereto.
(j) Conditions to Purchase of Option Securities. In the event
that the Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company and the Principal
Shareholder contained herein and the statements in any certificates
furnished by the Company or any subsidiary of the Company or by the
Principal Shareholder hereunder shall be true and correct as of each
Date of Delivery and, at the relevant Date of Delivery, the
Representatives shall have received:
(i) Officers' Certificates. Certificates, dated such Date of
Delivery, of the President of the Company and of the President or
a Vice President of the Principal Shareholder, respectively, and
of the chief financial or chief accounting officer of the Company
and of the Principal Shareholder, respectively, each confirming
that the certificates delivered at the Closing Time pursuant to
Section 5(d) hereof remain true and correct as of such Date of
Delivery.
(ii) Opinion of Counsel for Company and Principal
Shareholder. The favorable opinion of Buchanan Ingersoll
Professional Corporation, counsel for the Company, together with
the favorable opinion of Buchanan Ingersoll Professional
Corporation, counsel for the Principal Shareholder, each in form
and substance satisfactory to counsel for the Underwriters, dated
such Date of Delivery, relating to the Option Securities to be
purchased on such Date of Delivery and otherwise to the same
effect as the opinions required by Section 5(b) hereof.
(iii) Opinion of Counsel for Underwriters. The favorable
opinion of Simpson Thacher & Bartlett, counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise
to the same effect as the opinion required by Section 5(c)
hereof.
(iv) Bring-down Comfort Letter. A letter from Arthur Andersen
LLP, in form and substance satisfactory to the Representatives
and dated such Date of Delivery, substantially in the same form
and substance as the letter furnished to the Representatives
pursuant to Section 5(f) hereof, except that the "specified date"
in
19
<PAGE> 24
the letter furnished pursuant to this paragraph shall be a date
not more than five days prior to such Date of Delivery.
(k) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with
such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as
herein contemplated, or in order to evidence the accuracy of any of
the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company
in connection with the issuance and sale of the Securities as herein
contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(l) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of Option Securities, on a Date of Delivery which is after
the Closing Time, the obligations of the several Underwriters to
purchase the relevant Option Securities, may be terminated by the
Representatives by notice to the Company at any time at or prior to
Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and
effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. (1) The Company and the Principal
Shareholder, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) the violation of
any applicable laws or regulations of foreign jurisdictions where
Reserved Securities have been offered and (B) any untrue statement or
20
<PAGE> 25
alleged untrue statement of a material fact included in the supplement
or prospectus wrapper material distributed in any foreign jurisdiction
in connection with the reservation and sale of the Reserved Securities
or the omission or alleged omission therefrom of a material fact
necessary to make the statements therein, when considered in
conjunction with the Prospectus or preliminary prospectus, not
misleading;
(iii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission or in connection with any violation of the nature referred to
in Section 6(a)(ii)(A) hereof; provided that (subject to Section 6(d)
below) any such settlement is effected with the written consent of the
Company; and
(iv) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission or in connection with any
violation of the nature referred to in Section 6(a)(ii)(A) hereof, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(b) Indemnification of Company, Directors and Officers. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection
(a)(1) of this Section, as incurred, but only with respect to untrue statements
or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
21
<PAGE> 26
(c) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it
is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. In the case of parties indemnified pursuant to
Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company and
the Principal Shareholder. An indemnifying party may participate at its own
expense in the defense of any such action; provided, however, that counsel to
the indemnifying party shall not (except with the consent of the indemnified
party) also be counsel to the indemnified party. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of
any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(iii) effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) Indemnification for Reserved Securities. In connection with the
offer and sale of the Reserved Securities, the Company agrees, promptly upon a
request in writing, to indemnify and hold harmless the Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of eligible employees and persons having a
business relationship with the Company to pay for and accept delivery of
Reserved Securities which, by the end of the first business day following the
date of this Agreement, were subject to a properly confirmed agreement to
purchase.
22
<PAGE> 27
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Principal Shareholder on the one hand and the Underwriters on
the other hand from the offering of the Securities pursuant to this Agreement
or (ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and the Principal Shareholder on the one hand and of the Underwriters
on the other hand in connection with the statements or omissions, or in
connection with any violation of the nature referred to in Section 6(a)(ii)(A)
hereof, which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Principal
Shareholder on the one hand and the Underwriters on the other hand in
connection with the offering of the Securities pursuant to this Agreement shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Securities pursuant to this Agreement (before
deducting expenses) received by the Company and the Principal Shareholder and
the total underwriting discount received by the Underwriters, in each case as
set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company and the Principal Shareholder on the
one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company, the Principal
Shareholder or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission or any violation of the nature referred to in Section 6(a)(ii)(A)
hereof. For purposes of the preceding two sentences, the net proceeds deemed to
be received by the Company shall be deemed to be also for the benefit of the
Principal Shareholder and information supplied by the Company shall also be
deemed to have been supplied by the Principal Shareholder.
The Company, the Principal Shareholder and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 7
were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to above in this
Section 7. The aggregate amount of losses, liabilities, claims, damages and
expenses incurred by an indemnified party and referred to above in this Section
7 shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency
23
<PAGE> 28
or body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter,
and each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
shall have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries or of the Principal Shareholder submitted pursuant hereto, shall
remain operative and in full force and effect, regardless of any investigation
made by or on behalf of any Underwriter or controlling person, or by or on
behalf of the Company or the Principal Shareholder, and shall survive delivery
of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which
is such as to make it, in the judgment of the Representatives, impracticable to
market the Securities or to enforce contracts for the sale of the
24
<PAGE> 29
Securities, or (iii) if trading in any securities of the Company has been
suspended or materially limited by the Commission or the New York Stock
Exchange, or if trading generally on the American Stock Exchange or the New
York Stock Exchange or in the Nasdaq National Market has been suspended or
materially limited, or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices have been required, by any of said exchanges or by
such system or by order of the Commission, the National Association of
Securities Dealers, Inc. or any other governmental authority, or (iv) if a
banking moratorium has been declared by either Federal, New York or
Pennsylvania authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full force
and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but
not less than all, of the Defaulted Securities in such amounts as may be agreed
upon and upon the terms herein set forth; if, however, the Representatives
shall not have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase and of the
Company to sell the Option Securities to be purchased and sold on such
Date of Delivery shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the
obligation of the Underwriters to purchase and the Company to sell the relevant
Option Securities, as the case may be, either the Representatives or the
Company shall have the right to postpone the Closing Time or the relevant Date
of Delivery, as the case may be, for a
25
<PAGE> 30
period not exceeding seven days in order to effect any required changes in the
Registration Statement or Prospectus or in any other documents or arrangements.
As used herein, the term "Underwriter" includes any person substituted for an
Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to Merrill Lynch & Co., North Tower, World
Financial Center, New York, New York 10281-1201, attention of _______________,
telephone: (212) 449-____, facsimile: (212) 449-____, with a copy to Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, New York 10017, attention
of Vincent Pagano, Jr., telephone: (212) 455-2000, facsimile: (212) 455-2502;
and notices to the Company and the Principal Shareholder shall be directed to
each of them, respectively, at State Route 981 South, P.O. Box 231, Latrobe,
Pennsylvania 15650, attention of Michael Ruprich, telephone: (412) 539-5000,
facsimile: (412) 539-5701, with a copy to Buchanan Ingersoll Professional
Corporation, One Oxford Centre, 301 Grant Street, 20th Floor, Pittsburgh,
Pennsylvania 15219, attention of Lewis Davis, telephone: (412) 562-8953,
facsimile: (412) 502-1041.
SECTION 12. Parties. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters, the Company, the Principal Shareholder
and their respective successors. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, firm or
corporation, other than the Underwriters, the Company and the Principal
Shareholder and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and
legal representatives, any legal or equitable right, remedy or claim under or
in respect of this Agreement or any provision herein contained. This Agreement
and all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters, the Company and the Principal
Shareholder and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the Principal Shareholder
a counterpart hereof, whereupon this instrument, along with all counterparts,
will become a binding agreement among the Underwriters, the Company and the
Principal Shareholder in accordance with its terms.
26
<PAGE> 31
Very truly yours,
JLK DIRECT DISTRIBUTION INC.
By
---------------------------------
Title:
KENNAMETAL INC.
By
---------------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
GOLDMAN, SACHS & CO.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
---------------------------------------
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
27
<PAGE> 32
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
Name of Underwriter Securities
- ------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Goldman, Sachs & Co............................................
---------
Total.......................................................... 4,257,000
=========
</TABLE>
Sch A-1
<PAGE> 33
SCHEDULE B
JLK DIRECT DISTRIBUTION INC.
4,257,000 Shares of Class A Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be
$[________].
2. The purchase price per share for the Securities to be paid
by the several Underwriters shall be $[________], being an amount
equal to the initial public offering price set forth above less
$[________] per share; provided that the purchase price per share for
any Option Securities purchased upon the exercise of the
over-allotment option described in Section 2(b) shall be reduced by an
amount per share equal to any dividends or distributions declared by
the Company and payable on the Initial Securities but not payable on
the Option Securities.
Sch B-1
<PAGE> 34
SCHEDULE C
Kennametal Inc.
Sch C-1
<PAGE> 35
Exhibit A-1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the Commonwealth of
Pennsylvania.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus in the column entitled "Actual" under
the caption "Capitalization" (except for subsequent issuances, if any, pursuant
to the Purchase Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the exercise of
convertible securities or options referred to in the Prospectus); the shares of
issued and outstanding capital stock of the Company have been duly authorized
and validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company was issued in violation of
the preemptive or other similar rights of any securityholder of the Company.
(v) The Securities have been duly authorized for issuance and sale to
the Underwriters pursuant to the Purchase Agreement and, when issued and
delivered by the Company pursuant to the Purchase Agreement against payment of
the consideration set forth in the Purchase Agreement, will be validly issued
and fully paid and non-assessable and no holder of the Securities is or will be
subject to personal liability by reason of being such a holder.
(vi) The issuance of the Securities is not subject to preemptive or
other similar rights of any securityholder of the Company.
(vii) Each Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction
of its incorporation, has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to transact business
and is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect; except as otherwise
A-1, page 1
<PAGE> 36
disclosed in the Registration Statement, all of the issued and outstanding
capital stock of each Subsidiary has been duly authorized and validly issued,
is fully paid and non-assessable and, to the best of our knowledge is owned by
the Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the
outstanding shares of capital stock of any Subsidiary was issued in violation
of the preemptive or similar rights of any securityholder of such Subsidiary.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to the best of
our knowledge, no stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement has been issued under the
1933 Act and no proceedings for that purpose have been instituted or are
pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus and each amendment or supplement to the Registration
Statement and Prospectus as of their respective effective or issue dates (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which we need express no opinion) complied as to form
in all material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was not
"materially different," as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became effective.
(xii) The form of certificate used to evidence the Class A Common
Stock complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the charter and by-laws of
the Company and the requirements of the New York Stock Exchange.
(xiii) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to which the
Company or any subsidiary is a party, or to which the property of the Company
or any subsidiary is subject, before or brought by any court or governmental
agency or body, domestic or foreign, which might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the consummation of the transactions
contemplated in the Purchase Agreement or the performance by the Company of its
obligations thereunder.
(xiv) The information in the Prospectus under "Description of Capital
Stock--Common Stock" and "--Certain provisions in the Articles and Bylaws",
"Business--Legal Matters" and in the Registration Statement under Item 14, to
the extent that it constitutes matters of law,
A-1, page 2
<PAGE> 37
summaries of legal matters, the Company's charter and by-laws or legal
proceedings, or legal conclusions, has been reviewed by us and is correct in
all material respects.
(xv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are not
described as required.
(xvi) All descriptions in the Registration Statement of contracts and
other documents to which the Company or its subsidiaries are a party are
accurate in all material respects; to the best of our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto, and the descriptions thereof
or references thereto are correct in all material respects.
(xvii) To the best of our knowledge, neither the Company nor any
subsidiary is in violation of its charter or by-laws and no default by the
Company or any subsidiary exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other agreement
or instrument that is described or referred to in the Registration Statement or
the Prospectus or filed as an exhibit to the Registration Statement.
(xviii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and the
1933 Act Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we need express
no opinion) is necessary or required in connection with the due authorization,
execution and delivery of the Purchase Agreement or for the offering, issuance
or sale of the Securities.
(xix) The execution, delivery and performance of the Purchase
Agreement and the consummation of the transactions contemplated in the Purchase
Agreement and in the Registration Statement (including the issuance and sale of
the Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use Of Proceeds") and compliance
by the Company with its obligations under the Purchase Agreement do not and
will not, whether with or without the giving of notice or lapse of time or
both, conflict with or constitute a breach of, or default or Repayment Event
(as defined in Section 1(a)(x) of the Purchase Agreement, and only with respect
to a Repayment Event, except as may be described in the Registration Statement)
under or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any subsidiary
pursuant to any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease or any other agreement or instrument, known to us, to
which the Company or any subsidiary is a party or by which it or any of them
may be bound, or to which any of the property or assets of the Company or any
subsidiary is subject (except for such conflicts, breaches or defaults or
liens, charges or encumbrances that would not have a Material Adverse Effect),
nor will such action result in any violation of the provisions of the charter
or by-laws of the Company or any subsidiary, or any
A-1, page 3
<PAGE> 38
applicable law, statute, rule, regulation, judgment, order, writ or decree,
known to us, of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or any subsidiary or any of
their respective properties, assets or operations.
(xx) Except as set forth in the Corporate Agreement (as defined in the
Prospectus), there are no persons with registration rights or other similar
rights to have any securities registered pursuant to the Registration Statement
or otherwise registered by the Company under the 1933 Act.
(xxi) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such
Registration Statement or any such amendment became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement thereto
(except for financial statements and schedules and other financial data
included therein or omitted therefrom, as to which we need make no statement),
at the time the Prospectus was issued, at the time any such amended or
supplemented prospectus was issued or at the Closing Time, included or includes
an untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of the laws of Michigan, upon the opinion of Gutman &
Bigelman, P.C., special counsel to the Company (which opinion shall be dated
and furnished to the Representative(s) at the Closing Time, shall be
satisfactory in form and substance to counsel for the Underwriters and shall
expressly state that the Underwriters may rely on such opinion as if it were
addressed to them), provided that Buchanan Ingersoll Professional Corporation
shall state in their opinion that they believe that they and the Underwriters
are justified in relying upon such opinion, and (B), as to matters of fact (but
not as to legal conclusions), to the extent they deem proper, on certificates
of responsible officers of the Company and public officials. Such opinion shall
not state that it is to be governed or qualified by, or that it is otherwise
subject to, any treatise, written policy or other document relating to legal
opinions, including, without limitation, the Legal Opinion Accord of the ABA
Section of Business Law (1991).
A-1, page 4
<PAGE> 39
Exhibit A-2
FORM OF OPINION OF PRINCIPAL SHAREHOLDER'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Principal Shareholder has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
Commonwealth of Pennsylvania.
(ii) The Principal Shareholder has corporate power and authority to
enter into and perform its obligations under the Purchase Agreement.
(iii) The Purchase Agreement has been duly authorized, executed and
delivered by the Principal Shareholder.
(iv) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and the
1933 Act Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we need express
no opinion) is necessary or required in connection with the due authorization,
execution and delivery of the Purchase Agreement by the Principal Shareholder
or for the offering, issuance or sale of the Securities.
(v) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use Of Proceeds") and compliance
by the Principal Shareholder with its obligations under the Purchase Agreement
do not and will not, whether with or without the giving of notice or lapse of
time or both, conflict with or constitute a breach of, or default or Repayment
Event (as defined in Section 1(a)(x) of the Purchase Agreement) under or result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Principal Shareholder or any of its subsidiaries
pursuant to any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease or any other agreement or instrument, known to us, to
which the Principal Shareholder or any of its subsidiaries is a party or by
which it or any of them may be bound, or to which any of the property or assets
of the Principal Shareholder or any of its subsidiaries is subject, nor will
such action result in any violation of the provisions of the charter or by-laws
of the Principal Shareholder or any of its subsidiaries, or any applicable law,
statute, rule, regulation, judgment, order, writ or decree, known to us, of any
government, government instrumentality or court, domestic or foreign, having
jurisdiction over the Principal Shareholder or any of its subsidiaries or any
of their respective properties, assets or operations.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434
A-2, page 1
<PAGE> 40
Information (if applicable), (except for financial statements and schedules and
other financial data included therein or omitted therefrom, as to which we need
make no statement), at the time such Registration Statement or any such
amendment became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto (except for financial statements and schedules
and other financial data included therein or omitted therefrom, as to which we
need make no statement), at the time the Prospectus was issued, at the time any
such amended or supplemented prospectus was issued or at the Closing Time,
included or includes an untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Principal Shareholder and public
officials. Such opinion shall not state that it is to be governed or qualified
by, or that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991).
A-2, page 2
<PAGE> 41
Exhibit B
________, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
GOLDMAN, SACHS & CO.
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by JLK Direct Distribution Inc.
Dear Sirs:
The undersigned, a shareholder of JLK Direct Distribution Inc., a
Pennsylvania corporation (the "Company"), understands that Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Goldman, Sachs & Co. propose to enter into a Purchase Agreement (the "Purchase
Agreement") with the Company providing for the public offering of shares (the
"Securities") of the Company's Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"). In recognition of the benefit that such an
offering will confer upon the undersigned as a shareholder of the Company, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the undersigned agrees with each underwriter to be
named in the Purchase Agreement that, during a period of 180 days from the date
of the Purchase Agreement, the undersigned will not, without the prior written
consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of Class A Common Stock or any
securities convertible into or exchangeable or exercisable for Class A Common
Stock (including the Company's Class B Common Stock, par value $.01 per share
(the "Class B Common Stock")), whether now owned or hereafter acquired by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, or file any registration statement under the
Securities Act of 1933, as amended, with respect to any of the foregoing or
(ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Class A Common Stock or any securities
convertible into or exchangeable or exercisable for Class A
B-1
<PAGE> 42
Common Stock (including Class B Common Stock), whether any such swap or
transaction is to be settled by delivery of Class A Common Stock or other
securities, in cash or otherwise. The foregoing sentence shall not apply to the
contribution by the undersigned to the Company of up to an aggregate of 640,000
shares of Class B Common Stock in conjunction with an exercise by the
Underwriters of the option as to all or any portion of the Option Securities.
Very truly yours,
KENNAMETAL INC.
By:
---------------------------------------
Its:
--------------------------------------
B-2
<PAGE> 1
Exhibit 2.a
AGREEMENT
THIS AGREEMENT is made and entered into this ____ day of ____________,
1997, by and between Kennametal Inc., a Pennsylvania corporation ("Company"),
JLK Direct Distribution Inc., a Pennsylvania corporation ("JLK"), and J&L
America, Inc., a Michigan corporation ("J&L").
WITNESSETH:
WHEREAS, Company owns and operates integrated industrial supply
programs which provide to large industrial manufacturers needs assessment, cost
analysis, procurement planning, supplier selection, "just-in-time" restocking
of supplies and ongoing technical support ("FSS Programs"); and
WHEREAS, J&L is a wholly-owned subsidiary of Company which engages in
the distribution of a broad range of metalworking tooling and related products
such as cutting tools, carbide and other tool inserts, abrasives, drills,
machine tool accessories, hand tools and other industrial supplies through
J&L's master catalog, monthly promotional sales flyer, telemarketing, direct
sales and showrooms; and
WHEREAS, Company owns all of the Class B Common Stock, par value $.01
per share, of JLK and JLK intends to effect an initial public offering (the
"Offering") of shares of the Class A Common Stock, par value $.01 per share, of
JLK and upon completion of the Offering, JLK will cease to be a wholly-owned
subsidiary of Company; and
WHEREAS, in connection with the Offering, Company intends to
contribute the FSS Programs to J&L and thereafter contribute all of the issued
and outstanding capital stock of J&L to JLK; and
WHEREAS, the Boards of Directors of Company and JLK have approved the
transactions contemplated herein and the parties hereto desire to enter into
and carry out the transactions contemplated by this Agreement in accordance
with the terms hereof;
NOW, THEREFORE, for and in consideration of the premises and the
mutual covenants and agreements set forth in this Agreement and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
covenant and agree as follows:
<PAGE> 2
ARTICLE I
THE TRANSACTION
Subject to the terms, upon the conditions, at the time and in the
manner set forth herein, (a) Company covenants and agrees to assign, transfer,
convey and deliver to J&L the FSS Programs (as defined in Section 3.1 hereof)
subject to the Assumed Liabilities (as defined in Section 4.1 hereof); (b) J&L
covenants and agrees to assume and to pay, perform and satisfy, or otherwise
discharge, as and when they become due, the Assumed Liabilities; and (c)
Company covenants and agrees to assign, transfer, convey and deliver to JLK all
of the issued and outstanding capital stock of J&L.
ARTICLE II
CLOSING, CLOSING DATE AND EFFECTIVE TIME
2.1 THE CLOSING AND CLOSING DATE. The closing of the transactions
contemplated hereby (the "Closing") shall take place at the offices of JLK,
State Route 981 South, Latrobe, PA 15650, at 10:00 a.m. local time on the
earlier of: (a) June 30, 1997; or (b) immediately prior to the closing of the
Offering, or on such other date or at such other place as the parties may agree
(the "Closing Date").
2.2 THE EFFECTIVE TIME. The effective time of the transactions
contemplated herein (the "Effective Time") shall be on the Closing Date.
ARTICLE III
TRANSFER OF FSS PROGRAMS AND J&L STOCK
3.1 FSS PROGRAMS ASSETS. At the Closing, Company shall assign,
transfer, convey and deliver to J&L, and J&L shall accept all right, title and
interest of Company in all of the assets of Company as the same relate
exclusively and solely to the FSS Programs (the "FSS Programs Assets").
The "FSS Programs Assets" shall be the following assets of Company:
(a) The machinery, equipment, vehicles, furniture, fixtures,
computer hardware and other capital assets used in connection
with the FSS Programs (the "Capital Assets");
(b) All customer accounts, customer notes and other receivables
of Company which represent amounts earned by or owed to
Company on account of the FSS Programs (the "Receivables");
2
<PAGE> 3
(c) The agreements, contracts, unfilled purchase and sales orders
and commitments in connection with the FSS Programs (the
"Contracts");
(d) All inventories of Company held for use in the FSS Programs,
including, without limitation, finished goods, supplies and
inventories (the "Inventories");
(e) All outstanding proposals and bids under which benefits
accrue or will accrue to the FSS Programs (the "Proposals and
Bids");
(f) The licenses, franchises, permits and other authorizations
from federal, state, local and other governmental or
administrative authorities (the "Permits");
(g) The inventions, patents, applications for patents, trade
names, trade dress, know-how, inventions, processes,
formulas, compositions, designs and background technology,
trademarks, service marks, registrations of trademarks and
service marks, applications for registration of trademarks
and service marks, copyrights, registrations of copyrights,
applications for registrations of copyrights, mask works,
registrations of mask works, applications for registration of
mask works, computer software programs, manufacturing,
engineering and other drawings, schematics, blueprints and
designs, licenses and agreements used in and/or developed for
the FSS Programs (the "Intellectual Property Assets");
(h) The business and goodwill of the FSS Programs;
(i) The books and records of Company relating primarily to the
FSS Programs; and
(j) All other assets of Company used in or necessary to conduct
the FSS Programs.
3.2 J&L STOCK. At the Closing, Company shall assign, transfer, convey,
and deliver to JLK and JLK shall accept all right, title and interest of
Company in and to all of the issued and outstanding capital stock of J&L (the
"J&L Stock"). The assignment, transfer, conveyance and delivery of the FSS
Programs Assets hereunder to J&L and the subsequent assignment, transfer,
conveyance and delivery of the J&L Stock hereunder to JLK are herein
collectively called the "Transfers."
3.3 EFFECTING TRANSFERS. To effect the Transfers, Company shall, on
the Closing Date, execute and deliver to J&L a General Assignment and such
other documents of conveyance that are reasonably necessary to effect the
transfer of the FSS Programs Assets, in accordance with the terms and
3
<PAGE> 4
conditions of this Agreement. Similarly, the Company shall on the Closing Date
deliver to JLK the J&L Stock duly endorsed for transfer thereof to JLK. The
Transfers shall be effected by Company to J&L and JLK, as applicable, as is and
where is as of the Closing Date.
ARTICLE IV
ASSUMPTION OF ASSUMED LIABILITIES
4.1 ASSUMED LIABILITIES. At the Closing, J&L shall assume, and on and
after the Closing shall pay, perform and satisfy, or otherwise discharge, as
and when they become due, all liabilities and obligations of Company as they
relate to the FSS Programs (the "Assumed Liabilities"). The term "liability" as
used in this Article IV shall include, without limitation, claims, indentures,
pledges, mortgages, security interests, collateral assignments, conditional
sales agreements or other title retention agreements, restrictions, liens,
charges, royalties, other claims of ownership by third parties or encumbrances
of any kind or nature whatsoever. J&L expressly acknowledges that the Assumed
Liabilities include, without limitation, the following:
(a) Any and all tax liabilities of Company arising out of the
transfer of the FSS Programs;
(b) All liability in respect of the Receivables and the
Inventories;
(c) All liability to perform under, and with regard to, the
Contracts and the Accounts;
(d) All liability to perform under, and with regard to, the
Proposals and Bids;
(e) All liabilities in respect of employees and employee benefit
matters as the same relate to the FSS Programs;
(f) All liability under product warranty obligations and product
liabilities, each with respect to products or services
provided in respect thereof sold, performed or delivered by
Company prior to the Closing Date as the same relate to,
arise from or are otherwise in connection with the FSS
Programs;
(g) All liability under, and with regard to, the Permits;
(h) All liability accruing prior to, on or after the Closing Date
as concerns the Intellectual Property Assets; and
(i) All other liabilities arising out of or in connection with
the FSS Programs.
4
<PAGE> 5
ARTICLE V
ACCESS TO INFORMATION
5.1 DELIVERY OF RECORDS. As soon as practicable after the Closing
Date, Company, JLK and J&L shall each deliver to the other party all books,
contracts, accounts and records relating to the other party's business and
employees and not then in such other party's possession to the extent Company,
JLK or J&L, as the case may be, knows or is made aware that such items are not
then in such other party's possession, and provided that Company, JLK or J&L,
as the case may be, may make photocopies of any such item prior to delivery.
5.2 INSPECTION OF INFORMATION. Company, JLK and J&L and each of its
officers, directors, agents, lenders, employees, attorneys, accountants and
other representatives shall have the right at any time during normal business
hours (in a manner that does not unreasonably interfere with the other party's
business operations) with reasonable advance notice, to inspect and examine,
make copies of or excerpts from (with copying costs to be borne by the
inspecting party) and have access to the books, contracts, accounts, records,
documents, communications, knowledgeable personnel, items or matters existing
or relating to periods prior to the Closing Date within each other's knowledge,
possession or control (and shall use reasonable efforts to cause its employees
and other persons or entities in possession of such to give similar access) in
respect of the inspecting party's business and not otherwise transferred to the
inspecting party.
5.3 CONFIDENTIALITY. Company, JLK and J&L shall hold confidential, and
shall cause their directors, officers, employees, auditors, attorneys,
financial advisors, banks, accountants and other agents, consultants and
advisors to hold confidential all confidential information concerning the other
party furnished to it by such other party or such other party's representatives
or otherwise received or obtained by it (the "Confidential Information"),
except to the extent that such Confidential Information (a) is or becomes
available to such party on a non-confidential basis prior to its disclosure by
the other party; (b) is or becomes available to the public other than as a
result of a disclosure by such party; (c) is or becomes available to such party
on a non-confidential basis from another source; (d) is disclosed in connection
with the preparation of tax returns or reports concerning any audit or other
proceeding concerning taxes; or (e) is requested by a governmental authority
other than through a voluntary act or omission of the party seeking to make
such disclosure, in which case the party requested to disclose such
Confidential Information shall use reasonable efforts to give the other party
advance written notice in order to allow the other party the opportunity to
obtain a protective order or other appropriate relief. Each party shall
exercise the same degree of care to protect such Confidential Information as it
takes to preserve confidentiality for its own similar information.
5
<PAGE> 6
5.4 ATTORNEY-CLIENT RELATIONSHIP. Each of Company, JLK and J&L will
use reasonable efforts to maintain, preserve and assert all privileges arising
under or relating to the attorney-client relationship, including, but not
limited to, the attorney-client privilege and work product doctrine. Company,
JLK and J&L shall not (and shall use reasonable efforts to cause its employees
not to) knowingly waive any privilege which could be asserted under applicable
law without the prior consultation with the other, and none of the parties
shall have the right to assert any such privilege as between them.
5.5 THIRD-PARTY REQUESTS FOR INFORMATION. Upon receipt by any party of
a subpoena, discovery or other request which calls for the production or
disclosure of privileged information or if any party obtains knowledge that any
current or former employee has received any subpoena, discovery or other
request which calls for the production or disclosure of privileged information,
the receiving party shall promptly notify the other party of the existence of
the request and shall provide a reasonable opportunity to review the requested
information and to assert any rights the other party may have under this
Article V or otherwise to prevent the production or disclosure of privileged
information. No party will produce or disclose any privileged information
unless (i) the other party has provided its express written consent to such
production or disclosure; or (ii) a governmental authority has requested such
information other than through a voluntary act or omission of the party seeking
to make such disclosure, in which case the party requested to produce or
disclose the information shall use reasonable efforts to give advance written
notice to the other party in order to allow the other party the opportunity to
obtain a protective order or other appropriate relief.
ARTICLE VI
COOPERATION; FURTHER ASSURANCES
6.1 GENERAL UNDERTAKINGS. Each party to this Agreement agrees to
cooperate fully with the other party hereto and its counsel and accountants and
other representatives, will use its best efforts to cause satisfaction of the
terms of this Agreement. The parties shall, upon request of the other parties
hereto, at any time and from time to time, execute, acknowledge, deliver and
perform all such further acts, deeds, assignments, transfers, conveyances,
powers of attorney and instruments of further assurances as may be necessary or
reasonably appropriate to carry out the provisions and intent of this
Agreement. Without limiting the generality of the foregoing, at and after the
Effective Time, Company will cooperate with J&L as J&L shall reasonably request
(and at J&L's expense to the extent Company incurs more than routine or nominal
administrative or ministerial costs) so that J&L has good and marketable title
to the FSS Programs Assets.
6
<PAGE> 7
6.2 CONTRACTS AND CONSENTS.
(a) Company and J&L shall use their reasonable efforts to secure
any and all consents, approvals or the expiration of any time
periods required for the consummation of the transactions
provided hereunder. All such consents or approvals shall be
in writing and shall be in form and substance reasonably
satisfactory to the parties to effect the consummation of the
transactions contemplated hereby. To the extent that the
transfer or assumption of any agreement, lease, contract or
other document or instrument or any other asset constituting
a FSS Programs Asset or an Assumed Liability requires the
consent of any person other than J&L or Company, this
Agreement shall not constitute a transfer or attempted
transfer, or assumption or attempted assumption, thereof
unless and until the consent or waiver of such person has
been obtained.
(b) If any such consent or waiver is not obtained, as of and from
the Effective Time until such waiver or consent is obtained,
on the request of J&L, Company shall (i) use its best efforts
to provide or cause to be provided to J&L the benefits of any
such agreement, lease, contract or other document or
instrument constituting an FSS Programs Asset for which such
consent or waiver has not been obtained, including, without
limitation, enforcing rights of Company arising from any such
agreement, lease, contract or other document or instrument
constituting an FSS Programs Asset; or (ii) shall authorize
J&L to act, and shall provide reasonable cooperation
necessary to enable J&L to do so, in Company's place pursuant
to such agreement, lease, contract or other document
constituting an FSS Programs Asset.
(c) With respect to any FSS Programs Asset or Assumed Liability
for which the consent or waiver necessary to effect the
transfer or the assumption has not been obtained, J&L shall
(i) use its best efforts to perform all obligations and
satisfy all liabilities of Company arising under any
agreement, lease, contract or other document or instrument
relating to such FSS Programs Asset; and (ii) use its best
efforts to pay, perform and satisfy or otherwise discharge in
full, as and when it becomes due, any such Assumed Liability.
(d) All costs of Company incurred after the Effective Time, other
than the routine or nominal administrative or ministerial
expenses of Company, arising out of or relating to the
performance by Company of its obligations pursuant to this
Section 6.2 or as a result of a breach by J&L of its
obligations under Section 6.2(c) shall be for the account of
J&L.
7
<PAGE> 8
ARTICLE VII
TERMINATION
This Agreement may be terminated at any time prior to the Closing by
and in the sole discretion of Company without the approval or consent of JLK or
J&L. In the event of such termination, each party to this Agreement shall not
have any liability of any kind whatsoever to the other party.
ARTICLE VIII
NOTICES
Any notice, request, demand or other communication given by any party
under this Agreement (each a "notice") shall be in writing, may be given by a
party or its legal counsel and shall be deemed to be duly given (i) when
personally delivered; (ii) upon delivery by United States Express Mail or
similar overnight courier service which provides evidence of delivery; (iii)
when five (5) days have elapsed after its transmittal by registered or
certified mail, postage prepaid, return receipt requested, addressed to the
party to whom directed at that party's address as it appears below or another
address of which that party has given notice; (iv) when transmitted by telex
(or equivalent service), the sender having received the answer back of the
addressee; or (v) the next business day when delivered by facsimile
transmission if a copy thereof is also delivered in person or by overnight
courier in the manner provided above. Notices of address change shall be
effective only upon receipt notwithstanding the provisions of the foregoing
sentence.
Notice to Company, JLK and J&L shall be sufficient if given to:
AS TO COMPANY: Kennametal Inc.
State Route 981 South
P. O. Box 231
Latrobe, PA 15650
Attn: R. L. McGeehan, President & CEO
Fax No.: 412/539-5776
AS TO J&L & JLK: JLK Direct Distribution Inc.
State Route 981 South
P. O. Box 231
Latrobe, PA 15650
Attn: M. W. Ruprich, President & CEO
Fax No.: 412/539-4668
8
<PAGE> 9
ARTICLE IX
MISCELLANEOUS
9.1 GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the Commonwealth of Pennsylvania
without regard to any jurisdiction's conflicts of laws provisions, as to all
matters, including, without limitation, matters of validity, construction,
effect, performance and remedies.
9.2 TITLES, HEADINGS AND CAPTIONS. The titles, headings or captions of
articles and sections in this Agreement and the various headings in the
schedules attached hereto are provided for convenient reference only, and shall
not be considered a part hereof for purposes of interpreting, construing or
applying this Agreement, and such titles, headings or captions shall not
define, limit, extend, explain or describe the meaning, scope or extent of this
Agreement or any of its terms or conditions.
9.3 GENDER AND NUMBER. Words and phrases herein shall be construed in
the singular or plural number and as masculine, feminine or neuter gender,
according to the context.
9.4 COUNTERPARTS; USE OF FACSIMILES. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which when taken together shall constitute one and the same instrument. The
reproduction of signatures by means of a telecopying device shall be treated as
though such reproductions are executed originals and each party hereto
covenants and agrees to provide the other parties with a copy of this Agreement
bearing original signatures within five (5) days following transmittal by
facsimile.
9.5 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties hereto respecting its subject matter and supersedes all
negotiations, preliminary agreements and prior or contemporaneous discussions
and understandings of the parties hereto in connection with the subject matter
hereof. This Agreement may be amended, modified or supplemented only by a
writing signed by both parties by their duly authorized representatives.
9.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of the parties hereto, but
neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by either party hereto without the prior written
consent of the other party.
9.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is solely for the
benefit of the parties hereto and is not intended to confer upon any other
9
<PAGE> 10
person except the parties hereto any rights or remedies hereunder. There are no
third-party beneficiaries to this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its duly authorized officer as of the date first
above written.
J&L AMERICA, INC. KENNAMETAL INC.
By_______________________ By_______________________
Name____________________ Name____________________
Title_____________________ Title_____________________
JLK DIRECT DISTRIBUTION INC.
By_______________________
Name____________________
Title_____________________
10
<PAGE> 1
Exhibit 2.b
DATED JUNE 15, 1997
(1) KENNAMETAL INC.
AND
(2) J&L AMERICA, INC.
AND
(3) KENNAMETAL HERTEL LIMITED
- -------------------------------------------------------------------------------
INTRA GROUP ASSET CONTRIBUTION AND TRANSFER AGREEMENT
- -------------------------------------------------------------------------------
<PAGE> 2
DATE: June 15, 1997
PARTIES:
(1) KENNAMETAL INC., a company incorporated in the Commonwealth of
Pennsylvania, USA, whose principal place of business is at State Route
981 South, Westmoreland County Airport, Latrobe, PA 15650, USA (the
"Transferor").
(2) J&L AMERICA, INC., a company incorporated in the State of Michigan,
USA whose principal place of business is at Livonia Executive Park,
31800 Industrial Road, Livonia, MI 48151-3359, USA (the "Transferee").
(3) KENNAMETAL HERTEL LIMITED, a company incorporated in England with
registered number 3338355, whose registered office is at The Pensnett
Estate, P.O. Box 2, Kingswinford, West Midlands DY6 7YX ("KHL").
RECITALS:
A. The Transferor operates in the United Kingdom through its branch,
Kennametal Hertel UK; registered number FC 015111-BR09585.
B. The Transferee is a wholly-owned subsidiary of Transferor and will
operate in the United Kingdom on completion through its branch J&L
Industrial Supply UK; registered number in process.
C. The Transferor markets, manufactures and distributes a broad range of
tools, industrial supplies and accessories for the metalworking,
mining and highway construction industries.
D. The Transferor has agreed with effect from the Transfer Date to
contribute, as a capital contribution, and otherwise transfer and the
Transferee has agreed to accept the Business, and the Assets used in
it, as a going concern on the terms and subject to the conditions set
out in this Agreement. Simultaneously herewith, the Transferor has
entered into an Intra Group Asset Contribution and Transfer Agreement
with KHL whereby Transferor will transfer contemporaneously herewith
to KHL the Excluded Assets (as defined herein).
TERMS AGREED:
1. DEFINITIONS:
In this Agreement:
1.1 Where the context so admits the following words and phrases have the
following meanings:
"ACCOUNTS" means the financial statements of the Transferor in
relation to the Business as at and for the accounting reference period
which ended on the Accounting Date (comprising a balance sheet and
profit and loss statement);
"ACCOUNTING DATE" means June 30, 1996;
<PAGE> 3
"ACCOUNTS RECEIVABLE" means all book debts, notes receivable and other
rights to payment arising from the operation of the Business before
the Transfer Date;
"ASSETS" means the assets agreed to be transferred as more
particularly described herein;
"THE BUSINESS" means the Business of marketing through catalogues,
telemarketing and mail order and distributing a broad range of
metalworking tools, industrial supplies and related products as
carried on by the Transferor in the UK under the trading name "J&L
Industrial Supply," through its branch on the Transfer Date at the
Property;
"THE CASH BALANCES" means the bank balances held by the Transferor on
the Transfer Date for the purposes of the Business;
"EMPLOYEES" means the employees of the Transferor employed in the
Business on the Transfer Date;
"EXCLUDED ASSETS" means the business and assets contributed and
otherwise transferred to KHL pursuant to and in accordance with that
certain Intra Group Asset Contribution and Transfer Agreement between
Transferor and KHL dated June 15, 1997;
"FURNITURE AND FURNISHINGS" means furniture and furnishings,
accessories and consumable supplies therefor owned or used by the
Transferor in the Business at the Transfer Date (excluding any items
which are subject to the Purchased Contracts);
"INVENTORY" means all finished goods owned by the Transferor on the
Transfer Date for sale in the Business;
"THE LIABILITIES" means all monies owed by and claimed against the
Transferor at the close of business on the Transfer Date in relation
to the Business in respect of contracts and other creditors including
wages of the Employees, the burden of all Purchased Contracts and/or
contingent claims and liabilities;
"PURCHASED CONTRACTS" means all current contracts for the sale of
goods or the supply of services by the Transferor in connection with
the Business and all orders, rights and engagements of the Transferor
in connection with the Business which are in existence and have not
been fully performed on the Transfer Date;
"TECHNICAL RECORDS" means the books of account, payroll stock and
other records, list of suppliers, VAT records, computer programs,
trade and advertising literature, all files, records, drawings and
other books and documents and like effects relating to the Business;
and
"TRANSFER DATE" means June 15, 1997.
1.2 References to clauses and schedules are to clauses and schedules to
this Agreement.
1.3 The headings in this Agreement are for convenience of reference only
and shall not affect the interpretation hereof.
<PAGE> 4
2. CONTRIBUTION AND TRANSFER OF ASSETS:
2.1 In accordance with the terms of this Agreement, the Transferor shall
contribute, as a capital contribution, and otherwise transfer, convey
and deliver free from all liens, charges and encumbrances whatsoever
and the Transferee shall accept, the Business as a going concern with
effect from the Transfer Date and all of the Assets described below,
and such other assets used or to be used in the Business not otherwise
listed below or reflected in the Technical Records or financial
statements, if any, of the Transferor:
2.1.1 the Accounts Receivable;
2.1.2 the Cash Balances;
2.1.3 the Furniture and Furnishings;
2.1.4 the Inventory;
2.1.5 the benefit, subject to the burden, of the Purchased
Contracts; and
2.1.6 the Technical Records.
2.2 Nothing in this Agreement shall operate to transfer from the
Transferor nor to impose any obligation or liability on the Transferee
in respect of any of the Excluded Assets.
3. ASSUMED LIABILITIES:
3.1 The Transferee shall assume, pay, satisfy, discharge, fulfill and
indemnify the Transferor against all the Liabilities and with effect
from the close of business on the Transfer Date, shall pay all proper
monies, taxes, rent, rates, costs, expenses and outgoings of whatever
nature thenceforth accruing or incurred in respect of the Business.
3.2 The Transferee confirms that it intends to use the Assets in carrying
on the same kind of business as that carried on by the Transferor. It
is accordingly expected and intended by the parties that the
provisions of Section 33 of the Value Added Tax Act 1983 and
Regulation 5 of the Value Added Tax (Special Provisions) Order 1992
shall apply to the transfer of the Assets and that no value added tax
shall be chargeable in respect thereof), but in the event that such
provisions do not apply to the transfer of the Assets, the amount so
chargeable shall be paid by the Transferee.
4. COMPLETION:
4.1 Completion of the contribution and transfer of the Business and the
Assets shall take place on the Transfer Date as follows:
4.1.1 The Transferor shall deliver to the Transferee possession of
the Assets as are transferable by delivery whereupon title to
those assets shall pass to the Transferee by delivery;
4.1.2 The Transferor shall place the Transferee in effective
possession, control and operation of the Business; and
<PAGE> 5
4.1.3 In the case of any of the Assets subject to credit sale,
lease, purchase, hire purchase and hiring agreements, with
effect from the Transfer Date the Transferor shall permit the
Transferee to have the use of the same as licensee only prior
to any necessary third party consents being obtained;
4.1.4 The Transferor shall deliver to KHL possession of the
Excluded Assets and the control and operation of the business
associated therewith.
4.2 Upon and after Completion, the Transferor shall, as hereinafter
provided, do and execute or procure the execution of all other
necessary acts, deeds, documents and things within its power for
effectively vesting the Business and the Assets in the Transferee and
pending the doing and executing of such acts, deeds, documents and
things shall hold the legal estate in such Assets in trust for the
Transferee.
4.3 In any case where the consent of any person, firm or corporate body
not a party to this Agreement is required for the contribution and
transfer from the Transferor to the Transferee of any Assets hereby
agreed to be contributed and transferred, the contribution and
transfer of such Assets shall be conditional upon such consent which
the Transferor shall use all reasonable endeavors to obtain as soon as
practicable.
5. EMPLOYEES:
The Transferee hereby agrees and acknowledges that with effect from
the Transfer Date the contract of employment of each of the Employees
was not terminated but continues to have effect as if originally made
between each Employee and the Transferee in accordance with and save
as may be otherwise provided by the Transfer of Undertakings
(Protection of Employment) Regulations 1981.
6. WARRANTIES:
6.1 The Transferor represents, warrants and undertakes to and with the
Transferee that each of the following Warranties is now and will at
the Transfer Date be true and accurate:
6.1.1 That the Transferor has good and marketable title to all the
Assets free from any encumbrances, other third party rights,
hire or hire purchase agreements, credit sale agreements,
agreements with payments on preferred terms or bills of sale
and any rights of any persons to call for any of the same;
6.1.2 That the Business has no liabilities, obligations or
contingencies of any kind, whether absolute, contingent,
unaccrued, asserted or unasserted, or otherwise, except
liabilities, obligations or contingencies that were in
existence on the Accounting Date and are fully accrued or
reserved in the Accounts or that have been incurred after
such date in the ordinary course of the Business; and
6.1.3 That the Transferor has obtained all necessary environmental
licenses, if any, for the carrying on of the Business and
that the licenses, if any, are all valid and subsisting.
<PAGE> 6
6.2 Each of the Warranties shall be separate and independent and, save as
expressly provided to the contrary, shall not be limited by reference
to or interference from any other Warranty or any other term of this
Agreement.
6.3 The Transferor shall not be liable in respect of claims under any of
the Warranties set out in Clause 6.1, above.
7. COSTS:
The Transferee shall pay all costs in relation to the contribution and
transfer of the Assets, including all legal and accountancy costs,
charges and expenses connected with the negotiation, preparation and
implementation of this Agreement, as well as any tax or duties arising
in connection with the transfer.
*The remainder of this page is left intentionally blank. Continued on next
page.
<PAGE> 7
8. GENERAL:
8.1 The provisions of this Agreement shall not be deemed to merge on
Completion, and so far as anything remains to be performed, shall
continue in full force and effect notwithstanding Completion.
8.2 The terms and conditions of this Agreement represent the entire
agreement between the parties relating to the transfer of the Business
and the Assets.
8.3 Any notices must be in writing and may be given to either party at its
registered office (or to such other address as may have been notified
to the other party from time to time) and shall be deemed in all cases
to have been received by the respective addressee twenty-four hours
after the date of dispatch of the relevant notice.
8.4 This Agreement shall be construed and take effect in all respects in
accordance with the laws of England.
IN WITNESS WHEREOF, the hands of authorized representatives of the
parties the day and year first above written.
By________________________ By_________________________
Authorized Representative Authorized Representative of
Kennametal Inc. of J&L America, Inc.
<PAGE> 1
Exhibit 5
Buchanan Ingersoll
PROFESSIONAL CORPORATION
Attorneys
Lewis U. Davis, Jr. One Oxford Centre
412-562-8953 301 Grant Street, 20th Floor
Pittsburgh, PA 15219-1410
Telephone: 412-562-8800
Fax: 412-562-1041
June 23, 1997
JLK Direct Distribution Inc.
Route 981 at Westmoreland County Airport
Latrobe, PA 15650
Ladies and Gentlemen:
We have acted as counsel to JLK Direct Distribution Inc., a
Pennsylvania corporation (the "Company"), in connection with the public
offering by the Company of up to 4,897,000 shares (the "Shares") of its Capital
Stock, par value $.01 per share, pursuant to a purchase agreement (the
"Purchase Agreement") to be entered into among the Company and Merrill
Lynch & Co. and Goldman Sachs & Co. and as representatives of the underwriters.
This opinion is furnished in connection with the filing by the Company of
Registration Statement No. 333-25989 on Form S-1 under the Securities Act of
1933, as amended (the "Registration Statement"), relating to the public
offering of the Shares.
We have examined such public corporate records and documents and such
questions of law, and have made such investigation, as we deemed appropriate
for purposes of this opinion. Based upon the foregoing, in our opinion the
Shares have been duly authorized and will be, when delivered to the
underwriters pursuant to the Purchase Agreement as contemplated by the
Registration Statement, validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus which forms a part of the Registration Statement.
Very truly yours,
Buchanan Ingersoll Professional Corporation
By: /s/ LEWIS U. DAVIS, JR.
-----------------------
Lewis U. Davis, Jr.
<PAGE> 1
EXHIBIT 10.l
JLK DIRECT DISTRIBUTION INC.
1997 STOCK OPTION AND INCENTIVE PLAN
SECTION 1. ESTABLISHMENT. There is hereby established the JLK Direct
Distribution Inc. 1997 Stock Option and Incentive Plan (hereinafter called the
"Plan") pursuant to which directors, officers and employees of JLK Direct
Distribution Inc. (hereinafter called the "Company") and its subsidiaries who
are mainly responsible for its continued growth and development and future
financial success may be granted options to purchase shares of Class A Common
Stock, par value $0.01 per share (the "Common Stock") of the Company and/or may
receive awards of shares of Common Stock in order to secure to the Company the
advantage of the incentive and sense of proprietorship inherent in stock
ownership by such persons, to reward such persons for services previously
performed and/or as an added inducement to continue to provide service to the
Company.
SECTION 2. DURATION. Options and share awards under this Plan may be
granted only within the ten-year period beginning on the date on which the Plan
is adopted by the stockholders. Any options or share awards outstanding after
the expiration of such ten-year period may be exercised within the periods
prescribed by Section 7.
SECTION 3. ADMINISTRATION. The Plan shall be administered by the full
Board of Directors or a committee constituted so as to permit transactions under
the Plan to comply with Rule 16b-3 (or any successor rule) promulgated under the
Securities Exchange Act of 1934, as amended (the "Plan Administrator"). Subject
to the provisions of the Plan, the Plan Administrator is authorized to adopt
such rules and regulations and to take such action in the administration of the
Plan as it shall deem proper.
SECTION 4. ELIGIBILITY. Directors, officers and employees of the
Company and its subsidiaries and Kennametal Inc., a Pennsylvania corporation
("Kennametal"), and its subsidiaries who, in the opinion of the Plan
Administrator, are mainly responsible for the continued growth and development
and future financial success of the business shall be eligible to participate in
the Plan. The Plan Administrator shall, in its sole discretion, from time to
time, select from such eligible persons those to whom options shall be granted
or shares awarded and determine the number of shares to be included in such
option or award; provided, however, that no option may be granted in
substitution for an outstanding option except as provided in Section 12(d). No
participant shall have any right to receive an option or share award, except as
the Plan Administrator in its discretion shall determine. The terms "parent" and
"subsidiary," where used in the Plan or in any stock option agreement entered
into under the Plan, mean a "parent corporation" and a "subsidiary corporation,"
respectively, as defined in Section 425 of the Internal Revenue Code of 1986, as
it may be amended from time to time (the "Code").
SECTION 5. SHARES SUBJECT TO THE PLAN. The total number of shares of
stock which may be issued pursuant to the Plan shall be 2,000,000 shares of
Common Stock provided, however, that: (i) the number of shares of Common Stock
to be issued pursuant to the Plan is subject to
<PAGE> 2
adjustment as provided in Section 12; and (ii) to the extent that options
granted under the Plan shall expire or terminate without being exercised or
shares awarded under the Plan shall be forfeited, such shares shall remain
available for purposes of the Plan. Common Stock to be issued under the Plan may
be either authorized and unissued shares or shares held in treasury by the
Company, including shares of Common Stock acquired by the Company in the open
market.
SECTION 6. TYPES OF OPTIONS. Options granted pursuant to the Plan may
be either options which are incentive stock options under Section 422 of the
Code (hereinafter called "Incentive Stock Options") or other options
(hereinafter called "Nonstatutory Stock Options"). Incentive Stock Options and
Nonstatutory Stock Options shall be granted separately hereunder. The Plan
Administrator, in its discretion, shall determine whether and to what extent
options granted under the Plan shall be Incentive Stock Options or Nonstatutory
Stock Options. The provisions of the Plan and any stock option agreement
pursuant to which Incentive Stock Options shall be issued shall be construed in
a manner consistent with Section 422 of the Code and rules and regulations
promulgated or proposed thereunder.
SECTION 7. TERMS OF OPTIONS. Each option granted under the Plan shall
be evidenced by a stock option agreement between the Company and the person to
whom such option is granted and shall be subject to the following terms and
conditions:
(a) Subject to adjustment as provided in Section 12 of this
Plan, the price at which each share covered by an option may be
purchased shall be determined in each case by the Plan Administrator;
provided, however, that such price shall not be less than the fair
market value thereof at the time the option is granted. If an optionee
owns (or is deemed to own under applicable provisions of the Code and
rules and regulations promulgated thereunder) more than ten percent
(10%) of the combined voting power of all classes of the stock of the
Company (or any parent or subsidiary of the Company) and an option
granted to such optionee is intended to qualify as an Incentive Stock
Option, the option price shall be no less than 110% of the fair market
value of the shares covered by the option on the date the option is
granted.
(b) The aggregate fair market value of shares of Common Stock
with respect to which Incentive Stock Options are first exercisable by
the optionee in any calendar year (under all Plans of the Company and
its subsidiaries) shall not exceed the limitations, if any, imposed by
Section 422(d) of the Code (or any successor provision). If any option
designated as an Incentive Stock Option, either alone or in conjunction
with any other option or options, exceeds the foregoing limitation, the
portion of such option in excess of such limitation shall automatically
be reclassified (in whole share increments and without fractional share
portions) as a Nonstatutory Stock Option, with later granted options
being so reclassified first.
(c) During the lifetime of the optionee the option may be
exercised only by the optionee. The option shall not be transferable by
the optionee otherwise than by will or by the laws of descent and
distribution or, if in compliance with Rule 16b-3 (or any successor
rule), pursuant to a domestic relations order. After the death of the
optionee,
- 2 -
<PAGE> 3
the option may be transferred to the Company upon such terms and
conditions, if any, as the Plan Administrator and the personal
representative or other person entitled to the option may agree within
the period specified in subsection 7(d)(iii) hereof.
(d) An option may be exercised in whole at any time, or in
part from time to time, within such period or periods (not to exceed
ten years from the granting of the option in the case of an Incentive
Stock Option) as may be determined by the Plan Administrator and set
forth in the stock option agreement (such period or periods being
hereinafter referred to as the "option period"), provided that:
(i) If the optionee who is an employee of the Company
or its parent or any of its subsidiaries shall cease to be
employed by the Company or its parent or any of its
subsidiaries, the option may be exercised only within three
months after the termination of employment and within the
option period or, if such termination was due to disability or
retirement (as hereinafter defined), within one year after
termination of employment and within the option period, unless
such termination of employment shall be for cause or in
violation of an agreement by the optionee to remain in the
employ of the Company or its parent or one of its
subsidiaries, in which case the option shall forthwith
terminate; provided, however, that the Plan Administrator may
in its sole discretion extend the option period of any option
for up to three years from the date of termination of
employment regardless of the original option period. For
purposes of the Plan, retirement shall mean the termination of
employment with the Company at a time when the participant in
the Plan is eligible to receive immediately payable retirement
benefits under the Company's then existing retirement plan or
under any other retirement plan that is maintained by a
Company subsidiary.
(ii) If the optionee who is a director of the Company
or Kennametal or any of their subsidiaries shall cease to
serve as a director of the Company and Kennametal or any of
their subsidiaries, the option may be exercised only within
three months after the cessation of service and within the
option period or, if such cessation was due to disability,
within one year after cessation of service and within the
option period, unless such cessation of service as a director
was the result of removal for cause, in which case the option
shall forthwith terminate; provided, however, that the Plan
Administrator may in its sole discretion extend the option
period of any option for up to three years from the date of
cessation of service regardless of the original option period.
- 3 -
<PAGE> 4
(iii) If the optionee shall die, the option may be
exercised only within 450 calendar days after the optionee's
death and within the option period and only by the optionee's
personal representative or persons entitled thereto under the
optionee's will or the laws of descent and distribution;
(iv) The option may not be exercised for more shares
(subject to adjustment as provided in Section 12) after the
termination of the optionee's employment, cessation of service
as a director or the optionee's death (as the case may be)
than the optionee was entitled to purchase thereunder at the
time of the termination of the optionee's employment or the
optionee's death;
(v) If an optionee owns (or is deemed to own under
applicable provisions of the Code and rules and regulations
promulgated thereunder) more than 10% of the combined voting
power of all classes of stock of the Company (or any parent or
subsidiary corporation of the Company) and an option granted
to such optionee is intended to qualify as an Incentive Stock
Option, the option by its terms may not be exercisable after
the expiration of five years from the date such option is
granted; and
(vi) No option granted to an optionee subject to
Section 16(b) may be exercised during the six-month period
beginning on the date of grant.
(e) The option price of each share purchased pursuant to an
option shall be paid in full at the time of each exercise (the "Payment
Date") of the option (i) in cash; (ii) by delivering to the Company a
notice of exercise with an irrevocable direction to a registered
broker-dealer under the Securities Exchange Act of 1934, as amended, to
sell a sufficient portion of the shares and deliver the sale proceeds
directly to the Company to pay the exercise price; (iii) in the
discretion of the Plan Administrator, through the delivery to the
Company of previously owned shares of Common Stock having an aggregate
fair market value equal to the option price of the shares being
purchased pursuant to the exercise of the option; provided, however,
that shares of Common Stock delivered in payment of the option price
must have been held by the participant for at least six (6) months in
order to be utilized to pay the option price; (iv) through an election
pursuant to Section 8 hereof to have shares of Common Stock otherwise
issuable to the optionee withheld to pay the exercise price of such
option; or (v) in the discretion of the Plan Administrator, through any
combination of the payment procedures set forth in subsections (i)-(iv)
of this Section 7(e).
(f) The Plan Administrator, in its discretion, may authorize
"stock retention options" which provide, upon the exercise of an option
granted under this Plan, the Stock Option Plan of 1982, the Stock
Option and Incentive Plan of 1988 or the Stock Option and Incentive
Plan of 1992 (a "prior option") using previously owned shares, for the
automatic issuance of a new option under this Plan with an exercise
price equal to the current fair market value and for up to the number
of shares equal to the number of
- 4 -
<PAGE> 5
previously owned shares delivered in payment of the exercise price of
the prior option. Such stock retention option shall have the same
option period as the prior option.
(g) In consideration for the granting of each option, the
optionee shall agree to remain in the employment of the Company or one
of its subsidiaries, at the pleasure of the Company or such subsidiary,
for at least one year from the date of the granting of such option or
until the first day of the month coinciding with or next following the
optionee's sixty-fifth birthday, whichever may be earlier. Nothing
contained in the Plan nor in any stock option agreement shall confer
upon any optionee any right with respect to the continuance of
employment by the Company or any of its subsidiaries nor interfere in
any way with the right of the Company or any subsidiary to terminate
his employment or change his compensation at any time.
(h) The Plan Administrator may include such other terms and
conditions not inconsistent with the foregoing as the Plan
Administrator shall approve. Without limiting the generality of the
foregoing sentence, the Plan Administrator shall be authorized to
determine that options shall be exercisable in one or more installments
during the term of the option and the right to exercise may be
cumulative as determined by the Plan Administrator.
SECTION 8. SHARE WITHHOLDING.
(a) An optionee may, in the discretion of the Plan
Administrator, elect to pay the exercise price of an option, in whole
or in part, by requesting that the Company withhold shares of stock
otherwise issuable to the optionee having a fair market value equal to
the portion of the exercise price of the option being paid pursuant to
such election (a "Share Withholding Election").
(b) A Share Withholding Election must be in writing and must
be delivered to the Company no later than with the delivery of the
notice of exercise of the option.
SECTION 9. SHARE AWARDS.
(a) The Plan Administrator may, from time to time, subject to
the provisions of the Plan, award shares to participants; provided,
however, that the maximum number of shares of Common Stock that may
take the form of share awards is 100,000.
(b) The award of shares shall be evidenced by a share award
agreement executed by the Company and the grantee setting forth the
number of shares of Common Stock awarded, the vesting period, the
vesting schedule or criteria and such other terms and conditions as the
Plan Administrator may determine.
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(c) The grantee of a share award shall receive shares of
Common Stock without payment to the Company immediately upon grant;
provided, however, that the grantee's ownership of such shares shall be
subject to the following terms and conditions:
(i) Any single award of shares to a participant in an
amount greater than 100 shares shall vest in installments upon
achievement by the Company or grantee of specified performance
goals as determined by the Plan Administrator and as provided
in the share award agreement;
(ii) If the grantee or the Company, as the case may
be, fails to achieve the designated goals or the grantee
ceases to be employed by the Company for any reason (including
death, permanent disability or retirement) prior to the
expiration of the vesting period, the grantee shall forfeit
all shares so awarded which have not then vested;
(iii) A grantee who has received a share award
pursuant to the Plan shall have all rights of a stockholder in
such Common Stock, including but not limited to the right to
vote and receive dividends with respect thereto; provided,
however, that shares awarded pursuant to the Plan which have
not vested may not be sold or otherwise transferred by the
grantee and stock certificates representing such shares shall
bear a restrictive legend to that effect; and
(iv) No share award (or portion thereof) granted to a
person subject to Section 16(b) shall vest within the
six-month period beginning on the date of grant of such share
award.
SECTION 10. LIMITATION ON OPTIONS AND AWARDS. The aggregate number of
shares covered by any options or share awards to one person shall not exceed
fifteen percent (15%) of the aggregate number of shares subject to the Plan as
provided in Section 5 hereof.
SECTION 11. TAX WITHHOLDING.
(a) Whenever shares are to be issued under the Plan, the
Company shall have the right to require the grantee to remit to the
Company an amount sufficient to satisfy federal, state and local tax
withholding requirements prior to the delivery of any certificate for
such shares; provided, however, that in the case of a grantee who
receives an award of shares under the Plan which is not fully vested,
the grantee shall remit such amount on the first business day following
the Tax Date. The "Tax Date" for purposes of this Section 11 shall be
the date on which the amount of tax to be withheld is determined. If an
optionee makes a disposition of shares acquired upon the exercise of an
Incentive Stock Option within either two years after the option was
granted or one year after the receipt of stock by the optionee, the
optionee shall promptly notify the Company and the Company shall have
the right to require the optionee to pay to the Company an amount
sufficient to satisfy federal, state and local tax withholding
requirements.
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<PAGE> 7
(b) A grantee who is obligated to pay the Company an amount
required to be withheld under applicable tax withholding requirements
may pay such amount (i) in cash; (ii) in the discretion of the Plan
Administrator, through the delivery to the Company of previously owned
shares of Common Stock having an aggregate fair market value on the Tax
Date equal to the tax obligation provided that the previously owned
shares delivered in satisfaction of the withholding obligations must
have been held by the participant for at least six (6) months; or (iii)
in the discretion of the Plan Administrator, through a combination of
the procedures set forth in subsections (i) an (ii) of this Section
11(b).
(c) A grantee who is obligated to pay to the Company an amount
required to be withheld under applicable tax withholding requirements
in connection with either the exercise of a Nonstatutory Stock Option
or a share award under the Plan may, in the discretion of the Plan
Administrator, elect to satisfy this withholding obligation, in whole
or in part, by requesting that the Company withhold shares of stock
otherwise issuable to the grantee having a fair market value on the Tax
Date equal to the amount of the tax required to be withheld; provided,
however, that shares may be withheld by the Company only if such
withheld shares have vested. Any fractional amount shall be paid to the
Company by the optionee in cash or shall be withheld from the
optionee's next regular paycheck.
(d) An election by a grantee to have shares of stock withheld
to satisfy federal, state and local tax withholding requirements
pursuant to Section 11(c) (a "Tax Withholding Election") must be in
writing and delivered to the Company prior to the Tax Date.
SECTION 12. ADJUSTMENT OF NUMBER AND PRICE OF SHARES.
(a) In the event that a dividend shall be declared upon the
Common Stock of the Company payable in shares of said stock, the number
of shares of Common Stock covered by each outstanding option and the
number of shares which may be issued pursuant to the Plan but are not
yet covered by outstanding options shall be adjusted by adding thereto
the number of shares of Common Stock which would have been
distributable thereon if such shares had been outstanding on the date
fixed for determining the stockholders entitled to receive such stock
dividend.
(b) In the event that the outstanding shares of Common Stock
of the Company shall be changed into or exchanged for a different
number or kind of shares of stock or other securities of the Company or
of another corporation, whether through reorganization,
recapitalization, stock split-up, combination of shares, merger or
consolidation, then there shall be substituted for the shares of Common
Stock covered by each outstanding option, and the shares which may be
issued pursuant to the Plan but are not yet covered by outstanding
options, the number and kind of shares of stock or other securities
which would have been substituted therefor if such shares had been
outstanding on the date fixed for determining the stockholders entitled
to receive such changed or substituted stock or other securities.
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<PAGE> 8
(c) In the event there shall be any change, other than
specified in this Section 12, in the number or kind of outstanding
shares of Common Stock of the Company or of any stock or other
securities into which such Common Stock shall be changed or for which
it shall have been exchanged, then, if the Board of Directors shall
determine, in its discretion, that such change equitably requires an
adjustment in the number or kind of shares covered by outstanding
options and the shares which may be issued pursuant to the Plan but are
not yet covered by outstanding options, such adjustment shall be made
by the Board of Directors and shall be effective and binding for all
purposes of the Plan and on each outstanding stock option agreement.
(d) In the event that, by reason of a corporate merger,
consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the Board of Directors shall authorize
the issuance or assumption of a stock option or stock options in a
transaction to which Section 424(a) of the Code applies, then,
notwithstanding any other provision of the Plan, the Plan Administrator
may grant an option or options upon such terms and conditions as it may
deem appropriate for the purpose of assumption of the old option, or
substitution of a new option for the old option, in conformity with the
provisions of Code Section 424(a) and the rules and regulations
thereunder, as they may be amended from time to time.
(e) No adjustment or substitution provided for in this Section
12 shall require the Company to issue or to sell a fractional share
under any stock option agreement or share award agreement and the total
adjustment or substitution with respect to each stock option and share
award agreement shall be limited accordingly.
(f) In the case of any adjustment or substitution provided for
in this Section 12, the option price per share in each stock option
agreement shall be equitably adjusted by the Board of Directors to
reflect the greater or lesser number of shares of stock or other
securities into which the stock covered by the option may have been
changed or which may have been substituted therefor.
SECTION 13. FAIR MARKET VALUE. In any determination of fair market
value hereunder, fair market value shall be deemed to be the mean between the
highest and lowest sales prices for the Common Stock of the Company as reported
in the New York Stock Exchange -- Composite Transactions reporting system for
the date in question, or if no sales were made on that date, on the next
preceding date on which sales were made.
SECTION 14. CHANGE IN CONTROL.
(a) In the event of a Change in Control, as hereinafter
defined, of the Company or Kennametal, the following provisions shall
apply to options and share awards previously awarded under the Plan,
notwithstanding any provision herein or in any agreement to the
contrary:
(i) All options which provide for exercise in one or
more installments shall become immediately exercisable in
full;
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<PAGE> 9
(ii) If any optionee shall cease to be employed by
the Company or any of its subsidiaries within one (1) year
following a Change in Control, then the option may in all
events be exercised for a period of three months after such
termination of employment and within the option period; and
(iii) All awards of shares under the Plan which have
not previously vested shall become vested.
(b) The term "Change in Control" shall mean a change in
control of the Company or Kennametal of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A promulgated
under the Exchange Act as in effect on the date thereof or, if Item
6(e) is no longer in effect, any regulations issued by the Securities
and Exchange Commission pursuant to the Exchange Act which serve
similar purposes; provided that, without limitation, such a Change in
Control shall be deemed to have occurred if: (i) the Company or
Kennametal shall be merged or consolidated with another corporation or
entity, other than a corporation or entity which is an "affiliate" of
the Company or Kennametal, as the case may be (as such term is defined
in Rule 144(a) promulgated under the Securities Act of 1933), or (ii)
the Company or Kennametal shall sell all or substantially all of its
operating properties and assets to another person, group of associated
persons or corporation, excluding affiliates of the Company or
Kennametal, if any, or (iii) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes a
beneficial owner, directly or indirectly, of securities of the Company
or Kennametal representing 25% or more of the combined voting power of
the Company's or Kennametal's, as the case may be, then outstanding
securities coupled with or followed by the election as directors of the
Company or Kennametal, as the case may be, of persons who were not
directors at the time of such acquisition if such person shall elect a
majority of the Board of Directors of the Company or Kennametal, as the
case may be.
SECTION 15. AMENDMENT AND DISCONTINUANCE. The Board of Directors may
alter, amend, suspend or discontinue the Plan, provided that no such action
shall deprive any person without such person's consent of any rights theretofore
granted pursuant hereto.
SECTION 16. COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Notwithstanding
any provision of the Plan or the terms of any agreement entered into pursuant to
the Plan, the Company shall not be required to issue any shares hereunder prior
to registration of the shares subject to the Plan under the Securities Act of
1933 or the Exchange Act, if such registration shall be necessary, or before
compliance by the Company or any participant with any other provisions of either
of those acts or of regulations or rulings of the Securities and Exchange
Commission thereunder, or before compliance with other federal and state laws
and regulations and rulings thereunder, including the rules of the New York
Stock Exchange, Inc. The Company shall use its best efforts to effect such
registrations and to comply with such laws, regulations and rulings forthwith
upon advice by its counsel that any such registration or compliance is
necessary.
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<PAGE> 10
SECTION 17. COMPLIANCE WITH SECTION 16. With respect to persons subject
to Section 16 of the Exchange Act, transactions under this Plan are intended to
comply with all applicable conditions of Rule 16b-3 (or its successor rule). To
the extent that any grant of an option or share award fails to so comply, it
shall be deemed null and void to the extent permitted by law and to the extent
deemed advisable by the Plan Administrator.
SECTION 18. PARTICIPATION BY FOREIGN NATIONALS. The Plan Administrator
may, in order to fulfill the purposes of the Plan and without amending the Plan,
modify grants to foreign nationals or United States citizens employed abroad in
order to recognize differences in local law, tax policy or custom.
SECTION 19. EFFECTIVE DATE OF PLAN. The Plan shall become effective
upon approval and adoption of the Plan by the affirmative vote of holders of a
majority of the outstanding shares of stock of the Company.
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EXHIBIT 10.S
JLK DIRECT DISTRIBUTION INC. MANAGEMENT BONUS PLAN
It is anticipated that, prior to the Offering, the Company's Board of
Directors will adopt the JLK Bonus Plan for executives and managers which is
designed to tie bonus awards to Company performance, unit performance and
individual contribution, relative to the Company's business plans, strategies
and stockholder value creation. This bonus plan also is intended to maintain
management compensation at a competitive level, as indicated by published
compensation surveys. Each of the Named Executive Officers is eligible to
receive bonuses under this plan. The annual bonus opportunities for each of the
Named Executive Officers is specified above under "--Executive Compensation."
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
J&L America, Inc., a Michigan corporation d/b/a J&L Industrial Supply
Strelinger Company, a Michigan corporation
Mill & Abrasive Supply, Inc., a Michigan corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
June 20, 1997
